UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the period ended ~~July~~October 31, ~~2008~~ 2009


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

For the transition period from to

Commission file number: 0-13667

PDG Environmental, Inc.

(Exact name of registrant as specified in its charter)

Delaware		22-2677298
Delaware (State or other jurisdiction of incorporation or organization)		22-2677298 (I.R.S. Employer Identification No.)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1386 Beulah Road, Building 801 Pittsburgh, Pennsylvania (Address of principal executive offices)		15235 (Zip Code)
1386 Beulah Road, Building 801
Pittsburgh, Pennsylvania		15235
(Address of principal executive offices)		(Zip Code)

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

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. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

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

As of ~~September~~December 98, ~~2008~~2009, there were 20,~~826~~875,109 shares of the registrants Common Stock, par value $0.02 per share, outstanding.

PDG Environmental, Inc. and Subsidiaries

~~INDEX~~Table of Contents

	Page
Part I — Financial Information	Page
Part I. Financial Information
Item 1. Consolidated Financial Statements And Notes To Consolidated Financial Statements		3
Item 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of October 31, 2009 (unaudited) and January 31, 2009		3
(a) Condensed Consolidated Balance Sheets as of July 31, 2008 (unaudited) and January 31, 2008		3
Consolidated Statements of Operations for the Three Months Ended October 31, 2009 and 2008 (unaudited)		4
(b) Consolidated Statements of Operations for the Three Months Ended July 31, 2008 and 2007 (unaudited)		4
Consolidated Statements of Operations for the Nine Months Ended October 31, 2009 and 2008 (unaudited)		5
(c) Consolidated Statements of Operations for the Six Months Ended July 31, 2008 and 2007 (unaudited)		5
Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2009 and 2008 (unaudited)		6
(d) Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2008 and 2007 (unaudited)		6
Notes to Consolidated Financial Statements (unaudited)		7
(e) Notes to Consolidated Financial Statements (unaudited)		7
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations		16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative And Qualitative Disclosures About Market Risk		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls And Procedures		19
Item 4. Controls and Procedures		19
Part II. Other Information
Item 1. Legal Proceedings		20
Item 4. Submission of Matters to a Vote of Security Holders		20
Item 6. Exhibits		21
Signatures		22
Exhibit Index		23
EX-10.8.2
EX-31.1
EX-31.2
EX-32


Part II — Other Information

Item 1. Legal Proceedings			20

Item 6. Exhibits			20

Signatures			21

Exhibit Index			22

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PDG ENVIRONMENTAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 31,			January 31,
	October 31,			January 31,
	2008			2008
	2009			2009
	(unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	14205,000		$	90314,000
Contracts Receivable, Net		2311,~~102~~634,000			2220,~~154~~677,000
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts		42,~~404~~194,000			3,~~325~~180,000
Inventories		~~650~~610,000			~~689~~616,000
Deferred Income Tax Asset		1,124,000			1,111,000
Income Taxes Receivable		84,000			355,000
Other Current Assets		667,000			94,000
Deferred Income Tax Asset		983,000			983,000
Total Current Assets		29,961,000			27,463,000
Other Current Assets		754,000			344,000
Property, Plant and Equipment		12,342,000			12,201,000
Total Current Assets		16,464,000			26,469,000
Less: Accumulated Depreciation		(10,341,000	)		(9,859,000	)
Property, Plant and Equipment		11,803,000			12,431,000
		2,001,000			2,342,000
Less: Accumulated Depreciation		(10,689,000	)		(10,786,000	)
Intangible Assets		4,335,000			4,718,000
		1,114,000			1,645,000
Goodwill		2,614,000			2,614,000
Intangible Assets, Net		3,559,000			4,026,000
Deferred Income Tax Asset		3,631,000			2,804,000
Goodwill		2,489,000			2,489,000
Contracts Receivable, Non Current		677,000			677,000
Deferred Income Tax Asset		2,948,000			2,948,000
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts, Non Current		3,327,000			3,327,000
Contracts Receivable, Non Current		1,200,000			1,820,000
Other Assets		297,000			300,000
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts, Non Current		750,000			1,630,000
Total Assets	$	46,843,000		$	44,245,000
Other Assets		298,000			345,000
Total Assets	$	28,822,000		$	41,372,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts Payable	$	117,~~241~~131,000		$	9,~~729~~411,000
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts		21,~~074~~257,000			1,~~832~~125,000
Accrued Income Taxes		~~218,000~~—			~~255~~44,000
Accrued Liabilities		62,~~104~~584,000			42,~~921~~742,000
Current Portion of Long-Term Debt		~~388~~12,870,000			~~412~~303,000
Mandatorily Redeemable Cumulative Convertible Series C Preferred Stock		~~3,954,000~~—			—137,000
Total Current Liabilities		23,~~979~~842,000			1713,~~149~~762,000
Long-Term Debt		11253,~~537,~~000			1015,~~679~~045,000
Mandatorily Redeemable Cumulative Convertible Series C Preferred Stock		—			34,~~446~~372,000
Total Liabilities		3524,~~516~~095,000			3133,~~274~~179,000
Stockholders’ Equity
Common Stock		418,000			418,000
Common Stock Warrants		1,628,000			1,628,000
Paid-In Capital		1920,~~959~~256,000			1920,~~728~~111,000
Accumulated Deficit		(1017,~~640~~537,000	)		(813,~~765~~926,000	)
Treasury Stock, at Cost		(38,000	)		(38,000	)
Total Stockholders’ Equity		114,~~327~~727,000			128,~~971~~193,000
Total Liabilities and Stockholders’ Equity	$	4628,~~843~~822,000		$	4441,~~245~~372,000

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	For the Three Months Ended July 31,
	For the Three Months Ended October 31,
	2008			2007
	2009			2008
Contract Revenues	$	2311,~~207~~548,000		$	2628,~~638~~134,000
Contract Costs		209,~~153~~611,000			2223,~~597~~770,000
Gross Margin		31,~~054~~937,000			4,~~041~~364,000
Loss on Sale of Fixed Assets		(4,000	)		—
Gain on Sale of Fixed Assets		55,000			—
Selling, General and Administrative Expenses		32,~~614~~653,000			23,~~991~~180,000
Income (Loss) from Operations		(~~564~~661,000	)		1,~~050~~184,000
Other Income (Expense):
Interest Expense		(~~202~~219,000	)		(~~309~~232,000	)
Non-Cash Interest Expense for Preferred Dividends and Accretion of Discount		~~(260,000~~—	)		(~~219~~271,000	)
Interest and Other Income		165,000			~~147~~24,000
		(446,000	)		(381,000	)
		(214,000	)		(479,000	)
Income (Loss) Before Income Taxes		(1875,~~010,~~000	)		~~669~~705,000
Income Tax (Benefit) Provision		(278,000	)		164,000
Income Tax Provision		—			363,000
Net Income (Loss)	$	(~~732~~875,000	)	$	~~505~~342,000
Earnings (Loss) Per Common Share — Basic:	$	(0.04	)	$	0.02
Earnings (Loss) Per Common Share — Dilutive:	$	(0.04	)	$	0.02
Earnings (Loss) Per Common Share — Diluted:	$	(0.04	)	$	0.02
Average Common Shares Outstanding		20,~~823~~875,000			20,~~588~~826,000
Average Dilutive Common Stock Equivalents Outstanding		—			~~759~~30,000
Average Common Shares and Dilutive Common Stock Equivalents Outstanding		20,~~823~~875,000			2120,~~347~~856,000

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	For the Six Months Ended July 31,
	For the Nine Months Ended October 31,
	2008			2007
	2009			2008
Contract Revenues	$	4036,~~922~~935,000		$	4869,~~338~~056,000
Contract Costs		3531,~~635~~717,000			4059,~~604~~405,000
Gross Margin		5,~~287~~218,000			79,~~734~~651,000
Loss on Sale of Fixed Assets		(6,000	)		—
Gain (Loss) on Sale of Fixed Assets		55,000			(6,000	)
Selling, General and Administrative Expenses		7,~~075~~826,000			510,~~805~~255,000
Income (Loss) from Operations		(1,794,000	)		1,929,000
(Loss) from Operations		(2,553,000	)		(610,000	)
Other Income (Expense):
Interest Expense		(~~405~~629,000	)		(~~580~~636,000	)
Non-Cash Interest Expense for Preferred Dividends and Accretion of Discount		(~~508~~484,000	)		(~~429~~779,000	)
Interest and Other Income		3755,000			~~152~~61,000
		(876,000	)		(857,000	)
		(1,058,000	)		(1,354,000	)
Income (Loss) Before Income Taxes		(2,670,000	)		1,072,000
(Loss) Before Income Taxes		(3,611,000	)		(1,964,000	)
Income Tax (Benefit) Provision		(795,000	)		253,000
Income Tax (Benefit)		—			(431,000	)
Net Income (Loss)	$	(1,875,000	)	$	819,000
Net (Loss)	$	(3,611,000	)	$	(1,533,000	)
Earnings (Loss) Per Common Share — Basic:	$	(0.09	)	$	0.04
(Loss) Per Common Share — Basic:	$	(0.17	)	$	(0.07	)
Earnings (Loss) Per Common Share — Dilutive:	$	(0.09	)	$	0.04
(Loss) Per Common Share — Diluted:	$	(0.17	)	$	(0.07	)
Average Common Shares Outstanding		20,~~819~~875,000			20,~~546~~821,000
Average Dilutive Common Stock Equivalents Outstanding		—			~~585,000~~—
Average Common Shares and Dilutive Common Stock Equivalents Outstanding		20,~~819~~875,000			2120,~~131~~821,000

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	For the Six Months Ended July 31,
	For the Nine Months Ended October 31,
	2008			2007
	2009			2008
Cash Flows from Operating Activities:
Cash Flows From Operating Activities:
Net Income (Loss)	$	(1,875,000	)	$	819,000
Net (Loss)	$	(3,611,000	)	$	(1,533,000	)
Adjustments to Reconcile Net Income (Loss) to Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization		~~894~~1,248,000			~~934~~1,353,000
Deferred Income Tax Benefit		(840,000	)		111,000
Deferred Income Taxes		—			(391,000	)
Interest Expense for Series C Preferred Stock Dividends and Accretion of Discount		~~508~~484,000			~~429~~779,000
Stock Based Compensation		~~229~~145,000			~~149~~312,000
Loss on Sale of Fixed Assets		6,000			—
Loss (Gain) on Sale of Fixed Assets		(55,000	)		6,000
Provision for Uncollectible Accounts		450,000			(39,000	)
Provision for Receivable Allowance		114,000			1,307,000
		(628,000	)		2,403,000
		(1,675,000	)		1,833,000
Changes in Current Assets and Liabilities:
Changes in Operating Assets and Liabilities:
Contracts Receivable		(19,~~398~~549,000	)		(68,~~812~~185,000	)
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts		(1,~~079~~866,000	)		~~145~~(1,795,000	)
Inventories		396,000			~~(116~~54,000	)
Accrued Income Taxes		(37128,000	)		~~306~~(249,000	)
Other Current Assets (Prepaid Insurance)		740,000			878,000
Other Current Assets		2,675,000			1,017,000
Accounts Payable		1(2,~~512~~280,000	)		12,~~689~~838,000
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts		~~242~~132,000			~~972~~1,320,000
Accrued Liabilities		~~629~~(411,000	)		~~795~~(528,000	)
Total Changes		~~648~~11,409,000			(25,~~143~~528,000	)
Net Cash Provided by Operating Activities		20,000			260,000
Net Cash Provided by (Used in) Operating Activities		9,734,000			(3,695,000	)
Cash Flows From Investing Activities:
Purchase of Property, Plant and Equipment		(~~153~~136,000	)		(~~365~~275,000	)
Proceeds from Sale of Fixed Assets		491,000			—4,000
Changes in Other Assets		3,000			(58,000	)
Payment of Accrued Earnout Liability		—			(100,000	)
Net Cash Used in Investing Activities		(146,000	)		(423,000	)
Changes in Other Assets		(103,000	)		(107,000	)
Net Cash (Used in) Investing Activities		(148,000	)		(478,000	)
Cash Flows From Financing Activities:
Proceeds from Debt		~~1,005,000~~—			~~960~~5,549,000
Proceeds from Exercise of Stock Options and Warrants		2,000			69,000
Proceeds from Exercise of Stock Options		—			2,000
Payment of Premium Financing Liability		(~~759~~2,477,000	)		(~~572~~1,090,000	)
Principal Payments on Debt		(~~198~~7,218,000	)		(~~185~~304,000	)
Net Cash Provided by Financing Activities		50,000			272,000
Net Cash Provided by (Used in) Financing Activities		(9,695,000	)		4,157,000
Net Increase (Decrease) in Cash and Cash Equivalents		(76,000	)		109,000
Net (Decrease) in Cash and Cash Equivalents		(109,000	)		(16,000	)
Cash and Cash Equivalents, Beginning of Year		90314,000			~~158~~90,000
Cash and Cash Equivalents, End of Period	$	14205,000		$	~~267~~74,000
Supplementary Disclosure of Non-Cash Investing and Financing Activity:
Decrease in Goodwill and Accrued Liabilities for Earnout Liability	$	—		$	(32126,000	)
Financing of Annual Insurance Premium	$	12,~~313~~730,000		$	~~983~~1,313,000
Non-Cash Purchase of Fixed Assets Financed Through Capital Leases	$	~~27,000~~—		$	~~176~~27,000

See accompanying notes to consolidated financial statements.

PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ~~AS OF AND FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2008 (UNAUDITED)~~

AS OF AND FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2009

(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The consolidated financial statements include PDG Environmental, Inc. and its wholly-owned subsidiaries (the “Corporation” or “Company”).

The condensed consolidated financial statements as of and for the three and ~~six~~nine months ended ~~July~~ October 31, ~~2008~~2009 and ~~2007~~2008, are unaudited and are presented pursuant to the rules and regulations of ~~the~~ the Securities and Exchange Commission (“SEC”). The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business (See Note 10 — Additional Information). Accordingly, these condensed consolidated ~~financial~~ financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, for the year ended January 31, ~~2008~~2009. In the opinion of management, the accompanying condensed ~~consolidated~~ consolidated financial statements reflect all adjustments (which are of a recurring nature) necessary for the fair statement of the results for the interim periods.

We have evaluated subsequent events occurring after the balance sheet date and up to the time of filing with the SEC on December 23, 2009, for the three and nine months ended October 31, 2009.

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

NOTE 2 — CONTRACTS RECEIVABLE

At ~~July~~October 31, ~~2008~~2009 and January 31, ~~2008~~2009, ~~contract~~contracts ~~receivables~~receivable consist of the following:

	July 31, 2008			January 31, 2008
	October 31, 2009			January 31, 2009
Billed completed contracts	$	10,883,000		$	14,326,000
Billed Completed Contracts	$	4,360,000		$	5,092,000
Contracts in Progress		139,~~896~~369,000			918,~~791~~484,000
		24,779,000			24,117,000
		13,729,000			23,576,000
Less allowance for Uncollectible Accounts		(1,000,000	)		(1,286,000	)
Less Allowance for Uncollectible Accounts		(895,000	)		(1,079,000	)
Net Contracts Receivables	$	23,779,000		$	22,831,000
Net Contracts Receivable	$	12,834,000		$	22,497,000

~~Contracts~~At ~~receivable at July~~October 31, ~~2008~~2009 and January 31, ~~2008~~2009, ~~include~~contracts receivable for billed completed contracts of $24.24 million and $25.41 million, respectively, is based on full completion of ~~retainage~~the ~~receivables~~project. AtThe remaining ~~July~~$9.4 million and $18.5 million of contracts receivable at October 31, ~~2008~~2009 and January 31, ~~2008~~2009, arespectively, ~~portion~~is ofrelated ~~the receivable~~to ~~balance,~~ongoing $0projects.7 At October ~~million~~31, ~~has~~2009 ~~been~~and ~~classified~~January 31, ~~as non-current because the Corporation does~~2009, ~~not~~approximately ~~anticipate~~$0.9 million ~~realizing~~and ~~the~~$1.1 million, ~~amount~~respectively, ~~within~~was ~~the~~included ~~normal~~as ~~operating~~allowance ~~cycle~~for uncollectible accounts.

AtContracts ~~July~~receivable at October 31, ~~2008,~~2009 ~~the~~and ~~Corporation~~January 31, ~~had~~2009, ~~approximately~~include $70.79 million ~~of costs~~ and ~~estimated earnings in~~$1.9 ~~excess~~million, respectively, of ~~billings~~retainage ~~on uncompleted contracts~~receivables. ~~Included~~At inOctober 31, ~~this~~2009 ~~amount~~and isJanuary 31, ~~approximately~~2009, ~~$4.2 million~~a portion of ~~costs~~the ~~related~~contracts toreceivable ~~contract~~balance, ~~claims and unapproved change orders. Of the~~ $231.82 million ~~in contracts~~and ~~receivable, approximately~~ $21.08 million, ofrespectively, ~~contracts~~has ~~receivable~~been classified ~~represent~~as ~~disputed~~non-current ~~or litigated~~because ~~items.~~the ~~The~~ Corporation ~~expects~~does tonot ~~process~~anticipate ~~change~~realizing ~~orders or pursue contract claims for at least~~ the ~~full~~ amount ~~of these costs relative to~~ within the ~~aforementioned~~normal ~~contracts~~operating cycle.

At October 31, 2009, the Corporation had approximately $2.9 million of costs and estimated earnings in excess of billings on uncompleted contracts. Included in this amount is approximately $0.8 million of costs related to contract claims and unapproved change orders. Of the $13.7 million in contracts receivable, approximately $1.9 million of contracts receivable represent disputed or litigated items. The Corporation expects to process change orders or pursue contract claims for at least the full amount of these costs relative to the aforementioned contracts.

NOTE 3 — INCOME TAXES

AThere was no deferred tax benefit ~~of $840,000, a current state income tax provision of $45,000,~~ and no current federal or state income tax provision ~~was~~ recorded for the ~~six~~nine months ended ~~July~~October 31, ~~2008~~2009. A ~~current federal~~deferred ~~income~~ tax benefit of $17391,000, a current state income tax ~~provision~~benefit of $~~159~~40,000, and ~~a deferred~~no ~~tax~~current ~~provision~~federal ofincome ~~$111,000~~tax provision was recorded for the ~~six~~ nine months ended ~~July~~October 31, ~~2007~~2008.

At July 31, 2008, the Corporation has approximately $6.4 million of net operating loss carryforwards for federal income tax purposes expiring in 2028 and approximately $500,000 of federal credit carryforwards, primarily Research and Development Tax Credits, expiring from 2022 to 2028.

Income taxes paid by the Corporation for the six months ended July 31, 2008 and 2007 totaled approximately $83,000 and $52,000, respectively.

At October 31, 2009, the Corporation has approximately $10.1 million of net operating loss carryforwards for federal income tax purposes expiring in 2029 and approximately $0.7 million of federal credit carryforwards, primarily Research and Development Tax Credits, expiring from 2022 to 2029.

At October 31, 2009, the gross deferred tax assets totaled $6.4 million. At October 31, 2009, it was determined that the recognition of the deferred income tax assets would not all be realized. Therefore, a valuation allowance of $2.5 million has been recorded and the net deferred tax assets totaled $3.9 million at October 31, 2009.

Income taxes paid by the Corporation for the nine months ended October 31, 2009 and 2008 totaled approximately $156,000 and $209,000, respectively.

NOTE 4 — TERM DEBT

The Corporation maintains a $1514.5 million line of credit with Huntington Bank (formerly Sky Bank). The current interest rate on the line of credit is ~~prime~~Prime plus 10.75% with a floor for Prime of 4.25% (at October 31, 2009, Prime was 3.25%).

On ~~July~~October 31, ~~2008~~2009, the balance on the line of credit was $117.18 million with an unused availability, based upon the asset based lending formula, of $20.43 million. The majority of the Corporation’s property and equipment are pledged as security for the above obligations. Effective ~~September~~ May 214, ~~2008~~ 2009, the Company and Huntington Bank amended the ~~line~~loan ofagreement ~~credit facility~~ which resulted in an extension of the maturity date from June 630, ~~2009~~2010 to ~~June~~August 303, 2010; a change in the interest rate to Prime plus 0.75% (with a floor for Prime of 4.25%); and includes various covenants relating to matters affecting the Corporation, including the annual required evaluation of the debt service coverage ratio, debt to worth ratio, and tangible net worth.

OnThe ~~July 31,~~Corporation ~~2008,~~paid ~~the~~approximately ~~Company~~$650,000 ~~was~~and ~~not in compliance with all of the financial covenants of the line of credit agreement however~~$636,000 asfor ~~part~~interest ofcosts ~~the~~during ~~amendment of~~ the ~~line~~nine ~~of credit facility the Company~~months ~~obtained~~ended ~~a waiver from Huntington Bank waiving the financial covenants as of July~~October 31, 2009 and 2008, respectively.

The Corporation’s ~~paid~~mortgage on its Pittsburgh operating location is at an interest ~~costs~~rate ~~totaling~~of ~~approximately~~4.875% fixed ~~$426~~until July 31,~~000~~ ~~and $582~~2011,~~000~~ and during the ~~six~~remainder of the term will be adjusted to 2.75% above the ~~months~~3-year ~~ended~~Treasury ~~July~~Index every three years. On October 31, ~~2008~~2009, ~~and~~the ~~2007,~~balance ~~respectively~~on the mortgage was $206,000.

~~The~~NOTE ~~Corporation’s~~5 ~~mortgage~~— onNET ~~its~~EARNINGS ~~Pittsburgh operating location is at an interest rate of 7.75% fixed until July~~(LOSS) ~~31,~~PER ~~2009~~COMMON ~~and is then adjusted to 2.75% above the 3-year Treasury Index every three~~SHARE ~~years. On July 31, 2008, the balance on the mortgage was $241,000.~~

~~NOTE~~The 5following —tables ~~NET~~set ~~EARNINGS~~forth ~~PER~~the ~~SHARE~~computation of basic and diluted earnings per share:

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


	For the Three Months
	Ended October 31,
	2009			2008
Numerator:

Net Income (Loss) — Numerator for basic earnings per share — income available to common stockholders	$	(875,000	)	$	342,000

Effect of dilutive securities:
Preferred stock dividends and accretion of discount		—			—


Numerator for diluted earnings per share — income available to common stock after assumed conversions	$	(875,000	)	$	342,000


Denominator:

Denominator for basic earnings per share — weighted average shares	$	20,875,000		$	20,826,000

Effect of dilutive securities:

Convertible Preferred Stock and related accrued dividends		—			—
Warrants		—			—
Employee Stock Options		—			30,000


Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions	$	20,875,000		$	20,856,000


Basic earnings (loss) per share	$	(0.04	)	$	0.02

Diluted earnings (loss) per share	$	(0.04	)	$	0.02

	For the Three Months
	Ended July 31,
	2008			2007
Numerator:
Net Income (loss) — Numerator for basic earnings per share—income available to common stockholders	$	(732,000	)	$	505,000
Effect of dilutive securities:
Preferred stock dividends and accretion of discount		—			—
Numerator for diluted earnings per share—income available to common stock after assumed conversions	$	(732,000	)	$	505,000
Denominator:
Denominator for basic earnings per share—weighted average shares		20,823,000			20,588,000
Effect of dilutive securities:
Convertible Preferred Stock and related accrued dividends		—			—
Warrants		—			—
Employee Stock Options		—			759,000
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		20,823,000			21,347,000
Basic earnings per share	$	(0.04	)	$	0.02
Diluted earnings per share	$	(0.04	)	$	0.02

For the three months ended July 31, 2008, diluted loss per share was the same as basic loss per share since the Company reported a net loss and therefore the effect of all potentially dilutive securities on the loss per share would have been antidilutive. For the three months ended July 31, 2007, 641,000 options and 5,689,000 warrants were not included in the calculation of diluted earnings per share as

~~their~~For ~~inclusion~~the ~~would~~three ~~have~~months ~~been~~ended ~~antidilutive.~~October 31, ~~The~~2009, ~~conversion~~diluted ofloss ~~the~~per ~~Series C Redeemable~~share ~~Convertible~~was ~~Preferred~~the ~~Stock~~same ~~was~~as ~~not~~basic ~~included~~loss inper share since the ~~calculation~~Company ofreported ~~diluted~~a ~~earnings~~net ~~per share~~loss ~~for~~and therefore the ~~three~~effect ~~months~~of ~~ended~~all ~~July 31,~~potentially ~~2007,~~dilutive securities ason ~~their~~the ~~inclusion~~loss per share would have been antidilutive.

	For the Six Months
	Ended July 31,
	2008			2007
Numerator:
Net Income (loss) — Numerator for basic earnings per share—income available to common stockholders	$	(1,875,000	)	$	819,000
Effect of dilutive securities:
Preferred stock dividends and accretion of discount		—			—
Numerator for diluted earnings per share—income available to common stock after assumed conversions	$	(1,875,000	)	$	819,000
Denominator:
Denominator for basic earnings per share—weighted average shares		20,819,000			20,546,000
Effect of dilutive securities:
Convertible Preferred Stock and related accrued dividends		—			—
Warrants		—			—
Employee Stock Options		—			585,000
Denominator for diluted earnings per share—adjusted weighted-average shares and assumed conversions		20,819,000			21,131,000
Basic earnings per share	$	(0.09	)	$	0.04
Diluted earnings per share	$	(0.09	)	$	0.04

For the three months ended October 31, 2008, 2,496,000 options and 5,689,000 warrants were not included in the calculation of diluted earnings per share as their inclusion would have been antidilutive. The conversion of the Series C Redeemable Convertible Preferred Stock was also not included in the calculation of diluted earnings per share as its inclusion would have been antidilutive.

For the six months ended July 31, 2008, diluted loss per share was the same as basic loss per share since the Company reported a net loss and therefore the effect of all potentially dilutive securities on the loss per share would have been antidilutive. For the six months ended July 31, 2007, 1,621,000 options and 5,689,000 warrants were not included in the calculation of diluted earnings per share as their inclusion would have been antidilutive. The conversion of the Series C Redeemable Convertible Preferred Stock was not included in the calculation of diluted earnings per share for the six months ended July 31, 2007, as their inclusion would have been antidilutive.


	For the Nine Months
	Ended October 31,
	2009			2008
Numerator:

Net (Loss) — Numerator for basic earnings per share — income available to common stockholders	$	(3,611,000	)	$	(1,533,000	)

Effect of dilutive securities:
Preferred stock dividends and accretion of discount		—			—


Numerator for diluted earnings per share — income available to common stock after assumed conversions	$	(3,611,000	)	$	(1,533,000	)

Denominator:

Denominator for basic earnings per share — weighted average shares	$	20,875,000		$	20,821,000

Effect of dilutive securities:

Convertible Preferred Stock and related accrued dividends		—			—
Warrants		—			—
Employee Stock Options		—			—


Denominator for diluted earnings per share — adjusted weighted — average shares and assumed conversions	$	20,875,000		$	20,821,000


Basic (loss) per share	$	(0.17	)	$	(0.07	)

Diluted (loss) per share	$	(0.17	)	$	(0.07	)

For the nine months ended October 31, 2009 and 2008, diluted loss per share was the same as basic loss per share since the Company reported a net loss and therefore the effect of all potentially dilutive securities on the loss per share would have been antidilutive.

NOTE 6 — STOCK OPTIONS

OnThe ~~February 1, 2006, the~~ Corporation’s ~~changed~~current ~~its~~ accounting method for its stock-based compensation plans ~~and~~utilizes ~~adopted~~ the ~~recognition and measurement principles of FASB Statement No. 123R,~~ ~~“Accounting for Stock-Based Compensation”. In adopting FASB 123R, the Corporation utilized the~~ modified prospective approach where by only the effect of granted but unvested options was recognized on a prospective basis. ~~Prior to fiscal year 2007, the Corporation accounted for its stock-based compensation plans under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations.~~ During the three ~~and six~~ months ended ~~July~~October 31, 2009 and 2008, the ~~Company~~ Company recognized $7620,000 and $~~182~~58,000 of stock-based employee compensation cost related to stock options. During the ~~three~~nine ~~and six~~ months ended ~~July~~October 31, ~~2007~~2009 and 2008, the Company recognized $56109,000 and $97240,000 of stock-based employee compensation cost related to stock options.

At ~~July~~October 31, ~~2008~~2009, the Corporation had ~~602~~323,~~500~~732 stock options subject to time vesting. During the ~~six~~nine months ended ~~July~~October 31, ~~2008~~2009, ~~67,500~~no stock options were issued by the Corporation ~~of which 7,500 options will vest equally over three years on the anniversary of the grant date and 60,000 options will vest immediately on the grant date~~. ~~During the six months ended July 31, 2007, 505,000 stock~~ options were issued by the Corporation of which 500,000 options will vest equally over five years on the anniversary of the grant date and 5,000 options will vest entirely in one year on the anniversary of the grant date.

During the nine months ended October 31, 2009 and 2008, no shares of the Corporation’s common stock were issued due to the exercise of stock options.

NOTE 7 — PRIVATE PLACEMENT OF SECURITIES — JULY 2005

The Company utilizes a closed-form model (Black-Scholes) to estimate the fair value of stock option grants on the dates of grant. The following are the assumptions for the grant of 67,500 stock options during the six months ended July 31, 2008:

Risk free interest rate	3.78% - 3.84	%
Expected dividend yield	0.00	%
Expected life of options	6.0 - 10.0	yrs
Expected volatility rate	98.16% - 98.66	%

Weighted average fair value of options granted during the six months ended July 31, 2008 $ 0.37

During the six months ended July 31, 2008 and 2007, 12,000 and 112,000 shares of the Corporation’s common stock were issued due to the exercise of stock options.

NOTE 7 — PRIVATE PLACEMENT OF SECURITIES — JULY 2005

Common Private Placement

Securities Purchase Agreement

On July 1, 2005, the Corporation executed a securities purchase agreement (the “Common Purchase Agreement”) with various institutional and accredited investors (the “Common Investors”) pursuant to which it agreed to sell in a private placement transaction (the “Common Private Placement”) for an aggregate purchase price of $1,500,000 (a) 1,666,667 shares of the Corporation’s Common Stock, par value $0.02 per share (the “Common Stock”), (b) warrants to purchase 416,667 shares of the Corporation’s Common Stock at an exercise price of $1.11 per share (“First Common Offering Warrants”) and (c) warrants to purchase 416,667 shares of the Corporation’s Common Stock at an exercise price of $1.33 per share (“Second Common Offering Warrants” and, together with the First Common Offering Warrants, the “Common Offering Warrants”). The $0.90 purchase price per share for the Common Stock represents approximately represents 80% of the average of the daily volume weighted average price of the Common Stock for the 20 day period prior to the execution of the Common Purchase Agreement. The Corporation closed the Common Private Placement on July 6, 2005. On November 21, 2005, the Corporation’s registration statement covering the common stock to be received upon the conversion of the preferred stock and the common stock to be received upon the exercise of the warrants for common stock was declared effective by the SEC.

Common Warrants

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

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

exercise. The Second Common Offering Warrants expire five years from the date of issuance and contain adjustment provisions upon the occurrence of stock splits, stock dividends, combinations, reclassifications or similar events of the Corporation’s capital stock, issuances of Corporation’s securities for consideration below the exercise price and pro rata distributions of cash, property, assets or securities to holders of the Corporation’s common stock. If the Second Common Offering Warrants are exercised in full in cash, the Corporation would receive upon such exercise aggregate proceeds of $554,167.

The net proceeds to the Corporation from the offering, after costs associated with the Common Stock portion of the offering, of $1,349,000 have been allocated among common stock and warrants based upon their relative fair values. The Corporation used the Black-Scholes pricing model to determine the fair value of the warrants to be $360,000.

Preferred Private Placement

Securities Purchase Agreement

On July 1, 2005, the Corporation executed a securities purchase agreement (“Preferred Purchase Agreement”) with various institutional and accredited investors (the “Preferred Investors”) pursuant to which it agreed to sell in a private placement transaction (the “Preferred Private Placement”) for an aggregate purchase price of $5,500,000 (a) 5,500 shares of the Corporation’s Series C Convertible Preferred Stock, stated value $1,000 per share (the “Preferred Shares”), (b) warrants to purchase 1,375,000 shares of the Corporation’s Common Stock at an exercise price of $1.11 per share (“First Preferred Offering Warrants”), (c) warrants to purchase 1,375,000 shares of the Corporation’s Common Stock at an exercise price of $1.33 per share (“Second ~~Preferred Offering~~ ~~Warrants” and, together with the First~~ Preferred Offering Warrants,” ~~the “Preferred Offering~~ Warrants”) and (d) warrants (“Over-Allotment Warrants”) to purchase (1) up to 1,375 shares of Series C Preferred Stock (the “Additional Preferred Shares”), (2) warrants to purchase up to 343,750 shares of Common Stock at $1.11 per share (“First Additional Warrants”) and (3) warrants to purchase up to 343,750 shares of Common Stock at $1.33 per share (“Second Additional Warrants” and, together with the First Additional Warrants, the “Additional Warrants”). The Preferred Private Placement closed on July 6, 2005.

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

On September 30, 2005, the Corporation’s shareholders approved to the Corporation’s Certificate of Incorporation to increase by 30 million the number of authorized shares of $0.02 par value common stock to a total of 60 million common shares. Subject to certain permitted issuances under the Preferred Purchase Agreement, the Corporation is also restricted from issuing additional securities for a period of six (6) months following the effective date of the Preferred Registration Statement without the prior written consent from the holders of the Preferred Shares.

All shares of the Series C Preferred Stock shall rank superior to the Corporation’s Common Stock and any class or series of capital stock of the Corporation hereafter creates.

Preferred Warrants

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

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

Corporation’s common stock. If the Second Preferred Offering Warrants are exercised in full in cash, the Corporation would receive upon such exercise aggregate proceeds of $1,828,750.

The net proceeds to the Corporation from the offering, after costs associated with the Preferred Stock portion of the offering, of $4,877,000 have been allocated among common stock and warrants based upon their relative fair values. The Corporation used the Black-Scholes pricing model to determine the fair value of the warrants to be $1,204,000.

Terms of the Preferred Stock

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

Outstanding ~~shares~~Preferred ofShares ~~preferred stock~~ that ~~have~~had not been converted to common stock at the maturity date of July 1, 2009 ~~are~~were payable in cash along with the related 8% per annum dividend. ~~Thus,~~Any ~~the~~remaining ~~preferred~~Series C ~~shares~~Preferred ~~and~~Stock ~~the~~were ~~related~~exchanged ~~amounts~~ for ~~accrued~~and ~~dividends~~cancelled ~~have been classified in current liabilities~~ as ofon ~~July~~May 3114, ~~2008.~~2009; ~~The~~therefore, ~~availability~~no Preferred ofShares ~~resources~~were entitled to ~~make~~be ~~the~~converted ~~payments due~~ on ~~July 1, 2009, will depend on~~ the ~~Corporation’s~~maturity ~~future~~date. ~~earnings,~~No ~~cash~~Preferred ~~flow~~Shares ~~and its ability to secure~~remain ~~additional financing~~outstanding.

~~Beginning 120 days following effectiveness of the registration statement, the Corporation may~~11 mandatorily convert the Preferred Shares into shares of Common Stock, if certain conditions are satisfied including, among other things: (a) if the average closing bid price of the Corporation’s Common Stock during any 20 consecutive trading day period is greater than 150% of the conversion price, (b) the Preferred Registration Statement is currently effective, (c) the maximum number of shares of Common Stock issued upon such mandatory conversion does not exceed 100% of the total 5 day trading volume of our Common Stock for the 5 trading day period preceding the mandatory conversion date and (d) no mandatory conversions have occurred in the previous 30 trading days.

The Corporation consulted FAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, FAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Corporation’s Own Stock” in accounting for the transaction. The preferred stock has been recorded as a liability after consulting FAS No. 150. Although the preferred includes conversion provisions, they were deemed to be non-substantive at the issuance date. Subsequent to the issuance, the Corporation’s stock price rose in part to Hurricane Katrina and the acquisition of the former Flagship operations, and a number of preferred shares were converted to common. Per FAS No. 150, there is to be no reassessment of the non-substantive feature.

After valuing the warrants for the purchase of the Corporation’s common stock issued with the convertible Preferred Shares ($1,204,000), the beneficial conversion contained in the Preferred Shares ($1,645,000) and the costs associated with the Preferred Stock portion of the financing ($623,000) the convertible preferred stock was valued at $2,028,000. The difference between this initial value and the face value of the Preferred Stock of $3,429,000 will be accreted back to the Preferred Stock as preferred dividends utilizing an effective interest rate of 25.2%. The accretion period is the shorter of the four-year term of the preferred or until the conversion of the preferred stock. For the three months ended July 31, 2008 and 2007, the accretion of the aforementioned discount was $147,000 and $114,000, respectively. For the six months ended July 31, 2008 and 2007, the accretion of the aforementioned discount was $285,000 and $221,000, respectively. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the accretion of the discount on the preferred stock is classified as interest expense in the Statement of Consolidated Operations.

A cumulative premium (dividend) accrues and is payable with respect to each of the Preferred Shares equal to 8% of the stated value per annum. The premium is payable upon the earlier of: (a) the time of conversion in such number of shares of Common Stock determined by dividing the accrued premium by the Conversion Price or (b) the time of redemption in cash by wire transfer of immediately available funds. For the three months ended July 31, 2008 and 2007, the accrued dividend was $76,000 and $76,000, respectively, for both the initial private placement in July 2005 and the subsequent exercise of the over-allotment option for additional shares of Preferred Stock. For the six months ended July 31, 2008 and 2007, the accrued dividend was $152,000 and $152,000, respectively. At July 31, 2008 and 2007, total accrued dividends were $920,000 and $615,000, respectively. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the preferred stock dividend is classified as interest expense in the Statement of Consolidated Operations.

Beginning 120 days following effectiveness of the registration statement, the Corporation may mandatorily convert the Preferred Shares into shares of Common Stock, if certain conditions are satisfied including, among other things: (a) if the average closing bid price of the Corporation’s Common Stock during any 20 consecutive trading day period is greater than 150% of the conversion price, (b) the Preferred Registration Statement is currently effective, (c) the maximum number of shares of Common Stock issued upon such mandatory conversion does not exceed 100% of the total 5 day trading volume of our Common Stock for the 5 trading day period preceding the mandatory conversion date and (d) no mandatory conversions have occurred in the previous 30 trading days.

The Corporation consulted the authoritative guidance on accounting for certain financial instruments with characteristics of both liabilities and equity, accounting for derivative instruments and hedging activities, and accounting for derivative financial instruments indexed to, and potentially settled in, a corporation’s own stock in accounting for the transaction and has recorded the preferred stock as a liability. Although the preferred includes conversion provisions, they were deemed to be non-substantive at the issuance date. Subsequent to the issuance, the Corporation’s stock price rose in part to Hurricane Katrina and the acquisition of the former Flagship operations, and a number of preferred shares were converted to common. In accordance with the related authoritative guidance, there is to be no reassessment of the non-substantive feature.

After valuing the warrants for the purchase of the Corporation’s common stock issued with the convertible Preferred Shares ($1,204,000), the beneficial conversion contained in the Preferred Shares ($1,645,000) and the costs associated with the Preferred Stock portion of the financing ($623,000) the convertible preferred stock was valued at $2,028,000. The difference between this initial value and the face value of the Preferred Stock of $3,429,000 will be accreted back to the Preferred Stock as preferred dividends utilizing an effective interest rate of 25.2%. The accretion period is the shorter of the four-year term of the preferred or until the conversion of the preferred stock. For the three months ended October 31, 2009 and 2008, the accretion expense of the aforementioned discount was $0 and $156,000, respectively. For the nine months ended October 31, 2009 and 2008, the accretion expense of the aforementioned discount was $323,000 and $441,000, respectively. In accordance with the related authoritative guidance on accounting for certain financial instruments with characteristics of both liabilities and equity, the accretion of the discount on the preferred stock is classified as interest expense in the Statement of Consolidated Operations.

A cumulative premium (dividend) accrues and is payable with respect to each of the Preferred Shares equal to 8% of the stated value per annum. The premium is payable upon the earlier of: (a) the time of conversion in such number of shares of Common Stock determined by dividing the accrued premium by the Conversion Price or (b) the time of redemption in cash by wire transfer of immediately available funds. For the three months ended October 31, 2009 and 2008, the dividend expense was $0 and $76,000, respectively, for both the initial private placement in July 2005 and the subsequent exercise of the over-allotment option for additional shares of Preferred Stock. For the nine months ended October 31, 2009 and 2008, the dividend expense was $102,000 and $228,000, respectively, for both the initial private placement in July 2005 and the subsequent exercise of the over-allotment option for additional shares of Preferred Stock. At October 31, 2009 and 2008, total accrued dividends were $0 and $996,000, respectively (see Exchange of Series C Preferred Stock). In accordance with the related authoritative guidance on accounting for certain financial instruments with characteristics of both liabilities and equity, the preferred stock dividend is classified as interest expense in the Statement of Consolidated Operations.

Over-Allotment Warrants

The Over-Allotment Warrants issued to each Preferred Investor provides such Preferred Investor the right to purchase at an exercise price of $1,000 per share (a) Additional Preferred Shares, in aggregate, up to 25% of the total number of shares of Series C Preferred Stock purchased by such Preferred Investor in the Preferred Private Placement, (b) First Additional Warrants exercisable for a number of shares of Common Stock in an amount, in aggregate, up to 6.25% of the total number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock purchased by such Preferred Investor in the Preferred Private Placement at an exercise price of $1.11 per share and (c) Second Additional Warrants exercisable for a number of shares of Common Stock in an amount, in aggregate, up to 6.25% of the total number of shares of the Common Stock issuable upon conversion of the Series C Preferred purchased by such Purchaser in the Preferred Private Placement at an exercise price of $1.33 per share.

From late October 2005 through mid December 2005, all holders of shares of our Series C Preferred exercised their over-allotment warrants resulting in the issuance of (i) 1,375 shares of Series C Preferred, (ii) warrants to purchase 343,750 shares of the Corporation’s Common Stock at an exercise price of $1.11 per shares and (iii) warrants to purchase 343,750 shares of the Corporation’s Common Stock at an exercise price of $1.33 per share. The warrants expire five years from the date of issuance. The exercise of the over-allotment warrants resulted in proceeds of $1,375,000 to the Corporation.

After valuing the warrants for the purchase of the Corporation’s common stock issued with the convertible Preferred Shares ($322,000), the beneficial conversion contained in the Preferred Shares ($432,000) and the costs associated with the exercise of the over-allotment ($69,000) the convertible preferred stock, issued in October 2005 from the exercise of the over-allotment option, will initially be valued at $552,000. The difference between this initial value and the face value of the Preferred Stock of $1,375,000 will be accreted back to the Preferred Stock as preferred dividends utilizing an effective interest rate of 25%. The accretion ~~of the discount related to the over-allotment option was $37,000 and $29,000 for the three months ended July 31, 2008 and 2007, respectively, and was classified as interest~~ expense ~~in the Consolidated Statement~~ of ~~Operations.~~ ~~The accretion of~~ the discount related to the over-allotment option was $~~71,000~~0 and $5639,000 for the ~~six~~three months ended ~~July~~ October 31, ~~2008~~2009 and ~~2007~~2008, respectively,

and was classified as interest expense in the Consolidated Statement of Operations. The accretion expense of the discount related to the over-allotment option was $59,000 and $110,000 for the nine months ended October 31, 2009 and 2008, respectively.

Registration Rights Agreements

In connection with the private placements in July 2005, the Corporation entered into registration rights agreements with the Common Stockholders and Preferred Stockholders. Under these registration rights agreements, the Corporation agreed to file a registration statement for the purpose of registering the resale of the common stock and the shares of common stock underlying the convertible securities we issued in the private placements. The registration rights agreements require the Corporation to keep the registration statement effective for a specified period of time. In the event that the registration statement is not filed or declared effective within the specified deadlines or is not effective for any period exceeding a permitted Black-Out Period (45 consecutive Trading Days but no more than an aggregate of 75 Trading Days during any 12-month period), then the Corporation will be obligated to pay the Preferred and Common Stockholders up to 12% of their purchase price per annum. On November 21, 2005 the Corporation’s Registration Statement was declared effective by the SEC. As of ~~July~~October 31, ~~2008~~2009, the Corporation has utilized ~~forty~~sixty-~~five~~seven of the permitted aggregate Black-Out days. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion / exercise or the shareholders cannot sell their shares due to a blackout event.

Warrant Derivative Liability

Both the preferred and Common Stock portions of the July 2005 private placement included registration rights agreements that imposed liquidating damages in the form of a monetary remuneration should the holders be subject to blackout days (i.e. days when the holders of the Corporation’s Common Stock may not trade the stock) in excess of the number permitted in the registration rights agreements. On November 21, 2005 the Corporation’s Registration Statement on Form S-2 was declared effective by the SEC. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion / exercise or the shareholders cannot sell their shares due to a blackout event. After assessing the provisions of the registration rights agreements and the related authoritative guidance a $20,000 warrant derivative liability was provided. No gain or loss on the derivative was recorded in the ~~six~~nine months ended ~~July~~October 31, ~~2008~~2009 and ~~2007~~2008 and the liability was recorded in accrued liabilities.

Conversion of Preferred Stock to Common Stock

During the ~~six~~nine months ended ~~July~~October 31, ~~2008~~2009 and ~~2007~~2008, there were no conversions of preferred stock to common stock.

Exercise of Warrants for Common Stock

During the ~~six~~nine months ended ~~July~~October 31, ~~2008~~2009 and ~~2007~~2008, there were no warrants exercised for common stock.

Exchange of Series C Preferred Stock

On May 14, 2009, the Company and its sole remaining preferred shareholder entered into an exchange agreement (the “Exchange Agreement”) pursuant to which the Series C Convertible Preferred Stock were surrendered and exchanged for a subordinated secured promissory note (the “Subordinated Note”), with the possibility of an additional note (the “Additional Note” and together with the Subordinated Note, the “Subordinated Notes”) to be issued by the Company with substantially the same terms in certain circumstances. The Subordinated Notes are subordinate only to the debt to Huntington Bank, our senior lender, pursuant to the terms of a subordinated and intercreditor agreement.

The principal amount of the Subordinated Note is $5.0 million, bears interest at an annual rate of 8% and is due on August 31, 2010. A monthly payment of principal and interest of $50,000 will be made with the remainder of the amount due on August 31, 2010. As part of the Exchange Agreement, if the Company has not entered into an agreement resulting in a Change in Control (as defined in the Exchange Agreement) by the Transaction Deadline or has not repaid the note in its entirety then the Additional Note of $600,000 would be issued by the Company with the substantially same terms as the Subordinated Note. On December 14, 2009, the Company and the subordinated lender entered into a waiver agreement that extended the transaction deadline to January 15, 2010. Due to the execution of the Exchange Agreement, $4.9 million of the Subordinated Note has been classified as a current liability as of October 31, 2009. As of May 14, 2009, upon the exchange and cancellation of these Series C Convertible Preferred Stock, no Preferred Shares remain outstanding.

The Company accounted for the Exchange Agreement as an extinguishment whereby the additional liability assumed was recognized currently in income. The loss on extinguishment is currently presented within the “Non-Cash Interest Expense for Preferred Dividends and Accretion of Discount” line-item on the Consolidated Statements of Operations.

NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS

At ~~July~~October 31, ~~2008~~2009 and January 31, ~~2008~~2009, the Corporation’s goodwill was $2~~,614,000 and $2,614,000, respectively~~.5 million.

At ~~July~~October 31, ~~2008~~2009 and January 31, ~~2008~~2009, the Corporation’s intangible assets, net of amortization expense, ~~was~~were $~~4,335,000~~3.6 million and $4.0 million,~~718,000,~~ respectively. For the three months ended ~~July~~October 31, 2009 ~~2008~~ and ~~2007~~ 2008, amortization expense of the intangible assets was $~~190~~213,000 and $~~195~~194,000, respectively. For the ~~six~~nine ~~month~~months ended ~~July~~October 31, ~~2008~~2009 and ~~2007~~2008, amortization expense of the intangible assets was $~~383~~617,000 and $~~384~~577,000, respectively.

~~SFAS~~The ~~No. 142~~related ~~“Goodwill~~authoritative guidance on goodwill and ~~Other~~other ~~Intangible~~intangible ~~Assets”~~assets prescribes a two-~~phase~~ step process for impairment testing of goodwill, which is performed annually, absent any indicators of impairment. The first ~~phase~~ step screens for impairment, while the second ~~phase~~step (if necessary) measures impairment. The Corporation has elected to perform its annual analysis during the fourth quarter of each year based upon goodwill balances as of the end of the year. ~~Although no indicators of impairment have been~~ ~~identified during the six months ended July 31, 2008, there can be no assurance that future goodwill impairment tests will not result in a charge to earnings.~~

NOTE 9 — NEW ACCOUNTING PRONOUNCEMENTS

In ~~September~~December ~~2006~~2007, the FASB ~~issued~~updated ~~Statement of Financial~~ Accounting Standards Codification (“~~SFAS~~ASC”) ~~No. 157~~Topic 805, ~~Fair~~ ~~Value Measurements~~Business Combinations, which ~~provides~~will change accounting guidance for ~~using~~business ~~fair~~combinations. ~~value~~Under ASC Topic 805, an acquiring entity will be required to ~~measure~~recognize all the assets acquired and liabilities assumed ~~and~~in ~~expands~~a ~~required~~transaction ~~information~~at ~~about~~their ~~the~~estimated ~~extent~~acquisition todate ~~which~~fair ~~companies~~values, ~~measure~~including ~~assets~~noncontrolling interests, accrued contingent liabilities and in-process research and development. Acquired contingent liabilities atwill ~~fair~~subsequently ~~value,~~be measured at the ~~information~~higher ~~used~~of tothe ~~measure~~acquisition ~~fair~~date fair value ~~and~~or the ~~effect~~amount ofdetermined ~~fair~~under ~~value measurements~~existing onguidance ~~earnings.~~for ~~SFAS~~non-acquired Nocontingencies. ~~157~~ ~~clarifies~~ASC ~~the~~Topic 805 ~~principle~~also provides that ~~fair~~acquisition ~~value~~costs ~~should~~will be ~~based~~expenses onas incurred, restructuring costs ~~the~~associated ~~assumptions~~with ~~that~~a ~~market~~business ~~participants~~combination ~~would~~will ~~use~~generally ~~when~~be ~~pricing~~expensed subsequent to the acquisition date, and that changes in deferred tax asset orvaluation ~~liability.~~allowances and income tax uncertainties ~~Implementation~~after ofthe ~~SFAS~~acquisition Nodate generally will affect income tax expense. ~~157~~ ASC Topic 805 is ~~required~~effective ~~for~~as of the ~~fiscal~~beginning ~~years~~of ~~beginning~~an entity’s first fiscal year after ~~November~~December 15, ~~2007~~2008, and will be applied prospectively for business combinations occurring on or after the date of adoption. Early adoption of ASC Topic 805 is prohibited. The standard, which was adopted effective February 1, ~~2008~~2009, did not have a significant impact on the Company’s consolidated financial statements.

In ~~September~~December ~~2006~~2007, the FASB ~~issued~~updated ~~SFAS~~ASC ~~No. 158~~Topic 810, ~~Employers’~~Consolidation, ~~Accounting~~which ~~for~~establishes ~~Defined~~new ~~Benefit Pension~~accounting and ~~Other~~reporting ~~Post~~standards ~~Retirement~~for ~~Plans~~the —noncontrolling aninterest ~~amendment~~(minority ofinterest) ~~FASB~~in ~~Statements~~a ~~No. 87,~~subsidiary ~~88, 106~~ and ~~132(R).~~for ~~SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize~~ the ~~over-funded~~deconsolidation ~~or under-funded status~~ of a ~~benefit~~subsidiary. ~~plan~~ASC inTopic ~~its~~810 ~~statement~~requires recognition of ~~financial~~a noncontrolling ~~position,~~interest ~~recognize~~ as aequity ~~component~~in ofthe ~~other~~consolidated ~~comprehensive~~financial ~~income,~~statements ~~net~~separate offrom ~~tax,~~the ~~gains~~parent’s orequity. ~~losses and~~Net ~~prior~~income ~~service~~attributable ~~costs~~to orthe ~~credits~~noncontrolling ~~that~~interest ~~arise~~is ~~during~~to ~~the~~be ~~period~~included ~~but~~in ~~are~~consolidated ~~not~~net ~~recognized~~income ~~as components of~~on ~~net~~the ~~periodic~~consolidated ~~benefit~~income ~~costs~~statement. ~~pursuant~~ASC toTopic ~~SFAS~~810 ~~No. 87,~~also ~~Employers~~clarifies ~~Accounting~~that ~~for~~changes ~~Pension,~~in ora ~~SFAS No.~~parent’s ~~106,~~ownership ~~Employers’~~interest ~~Accounting~~in ~~for~~a ~~Postretirement~~subsidiary ~~Benefits~~that ~~Other~~do ~~Than~~not ~~Pensions,~~result ~~measure~~in ~~defined~~deconsolidation ~~benefit plan~~are ~~assets~~equity ~~and~~transactions ~~obligations as of~~ if the ~~date~~parent ofretains ~~the~~its ~~employer’s~~controlling ~~fiscal year-end, and disclose in the notes to~~ financial ~~statements~~interest. ~~additional~~ASC ~~information~~Topic ~~about~~810 ~~certain~~requires ~~effects~~that ona ~~net~~gain ~~periodic~~or ~~benefit~~loss ~~cost~~be ~~for~~recognized ~~the~~in ~~next~~net ~~fiscal~~income ~~year~~upon ~~that~~deconsolidation ~~arise~~of ~~from~~a ~~delayed~~subsidiary ~~recognition~~based ofon the ~~gains~~fair orvalue ~~losses,~~of ~~prior~~the ~~service~~noncontrolling ~~costs~~equity orinvestment ~~credits,~~on ~~and~~the ~~transition~~deconsolidation ~~assets or obligations~~date. ~~The~~ASC ~~recognition~~Topic ~~and~~810 ~~disclosure provisions~~is ~~required~~effective byas ~~SFAS~~of ~~No. 158~~the beginning ~~are~~of ~~effective~~an ~~for the Corporation~~entity’s first fiscal year ~~ending January 31, 2007. The measurement date provisions are effective for fiscal years ending~~ after December 15, 2008. The standard, which was adopted effective February 1, ~~2008~~2009, did not have a significant impact on the Company’s consolidated financial statements.

InOn ~~February~~March ~~2007~~19, 2008, the FASB ~~issued~~updated ~~SFAS~~ASC ~~No. 159~~Topic 815, ~~The~~Derivatives ~~Fair~~and ~~Value~~Hedging. ~~Option~~ASC ~~for~~Topic ~~Financial~~815 ~~Assets and~~enhances ~~Financial~~required ~~Liabilities~~disclosures —regarding ~~Including~~derivatives anand ~~Amendment~~hedging ~~of FASB Statement No. 115~~activities, ~~which~~including ~~permits~~enhanced ~~entities~~disclosures toregarding ~~choose~~how: ~~fair~~(a) an ~~value~~entity ~~measurement~~uses ~~for~~derivative ~~many~~instruments; ~~financial~~(b) derivative instruments and ~~certain~~related hedged ~~other~~ items asare ~~of specified~~accounted ~~election~~for ~~dates.~~under ~~Business~~FASB ~~entities~~Statement ~~will~~No. 133, ~~thereafter~~Accounting ~~report~~for inDerivative ~~earnings the unrealized~~Instruments ~~gains~~ and ~~losses~~Hedging onActivities; ~~items~~and ~~for~~(c) derivative ~~which~~instruments ~~the~~and ~~fair~~related ~~value~~hedged ~~option~~items ~~has~~affect ~~been~~an ~~chosen. The fair value option~~entity’s ~~may~~financial beposition, ~~applied~~financial ~~instrument by instrument~~performance, ~~may not be applied to portions of instruments~~ and ~~is irrevocable~~cash ~~unless a new election date occurs~~flows. ~~SFAS~~ASC ~~No. 159~~Topic 815 is effective for anfiscal years ~~entity’s~~and ~~first fiscal~~interim ~~year~~periods beginning after November 15, ~~2007~~2008. ~~The~~Early application is encouraged. The standard, which was adopted effective February 1, ~~2008~~2009, did not have a significant impact on the Company’s consolidated financial statements.

In ~~December~~May ~~2007~~2009, the FASB ~~issued~~updated ~~SFAS~~ASC ~~No. 141~~Topic ~~(Revised 2007)~~855, ~~Business~~Subsequent ~~Combinations, which will change accounting guidance for business combinations~~Events. ~~Under~~ASC ~~SFAS~~Topic ~~No. 141R,~~855 anestablishes ~~acquiring entity~~general ~~will~~standards beof ~~required~~accounting tofor ~~recognize~~and ~~all~~disclosure ~~the~~of ~~assets~~events ~~acquired~~that ~~and~~occur ~~liabilities~~after ~~assumed~~the inbalance asheet ~~transaction~~date atbut ~~their~~before ~~estimated~~financial ~~acquisition~~statements ~~date~~are ~~fair~~issued ~~values,~~or ~~including~~are ~~noncontrolling~~available ~~interests,~~to ~~accrued contingent~~be ~~liabilities~~issued. ~~and~~Specifically, ~~in-process~~it ~~research~~provides that ~~and~~the ~~development.~~period ~~Acquired~~after ~~contingent~~the ~~liabilities will~~balance ~~subsequently~~sheet bedate ~~measured~~during atwhich ~~the~~management ~~higher~~ of ~~the~~a ~~acquisition~~reporting ~~date~~entity ~~fair~~should evaluate ~~value~~events or ~~the~~transactions ~~amount determined~~that ~~under~~may ~~existing~~occur ~~guidance~~ for ~~non-acquired~~potential ~~contingencies.~~recognition ~~SFAS~~or ~~No. 141R~~disclosure ~~also~~in ~~provides~~the ~~that~~financial ~~acquisition~~statements, ~~costs~~the ~~will~~circumstances beunder ~~expenses~~which asan ~~incurred,~~entity ~~restructuring~~should ~~costs~~recognize ~~associated~~events ~~with a business~~or ~~combination~~transactions ~~will~~occurring ~~generally~~after bethe ~~expensed~~balance ~~subsequent~~sheet todate ~~the~~in ~~acquisition~~its ~~date~~financial statements, and the disclosures that ~~changes~~an ~~in deferred~~entity ~~tax~~should ~~asset~~make ~~valuation~~about ~~allowances~~events ~~and~~or ~~income~~transactions ~~tax~~that ~~uncertainties~~occurred after the ~~acquisition~~balance sheet date ~~generally~~. ~~will~~The ~~affect~~standard ~~income~~was ~~tax~~adopted ~~expense.~~effective ~~SFAS No.~~August ~~141R~~1, is2009, ~~effective~~and as ofper ~~the~~Note ~~beginning~~1, ofwe anhave ~~entity’s~~evaluated ~~first~~subsequent ~~fiscal~~events ~~year~~occurring after ~~December 15,~~the ~~2008,~~balance ~~and~~sheet ~~will~~date beand ~~applied~~up ~~prospectively~~to ~~for business combinations occurring on or after~~ the ~~date~~time of ~~adoption.~~filing with ~~Early~~the ~~adoption~~SEC ofon ~~SFAS No.~~December ~~141R~~23, ~~is prohibited.~~2009, ~~The~~for ~~Corporation~~the ~~expects~~three toand ~~adopt~~nine ~~SFAS~~months ~~No. 141R~~ended ~~on February~~October 131, 2009.

In June 2009, the FASB updated ASC Topic 860, Transfers and Servicing. ASC Topic 860 amends the derecognition guidance and eliminates the exemption from consolidation for qualifying special-purpose entities. ASC Topic 860 is effective for financial statements issued for interim and annual periods ending after November 15, 2009. The adoption of the standard, effective February 1,2010, is not expected to have a significant impact on the Corporation’s consolidated financial statements.

In ~~December~~June ~~2007~~2009, the FASB ~~issued~~updated ~~SFAS~~ASC ~~No. 160~~Topic 810, ~~Noncontrolling Interests in Consolidated Financial Statements~~Consolidation, ~~which~~amends ~~establishes new accounting and reporting standards for~~ the ~~noncontrolling interest~~guidance ~~(minority~~applicable ~~interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS No.~~to ~~160~~variable ~~requires recognition of a noncontrolling~~ interest ~~as equity in the consolidated financial statements separate from the parent’s equity~~entities. ~~Net~~The ~~income~~amendments ~~attributable~~will tosignificantly ~~the~~affect ~~noncontrolling interest is to be included in consolidated net income on~~ the ~~consolidated~~overall ~~income statement. SFAS~~consolidation ~~No. 160~~analysis ~~also~~under ~~clarifies~~FASB ~~that~~Interpretation ~~changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. SFAS~~ No. ~~160 requires that a gain or loss be recognized in net income upon deconsolidation of a subsidiary based on the fair value of the noncontrolling equity investment on the deconsolidation date~~46(R). ~~SFAS~~ASC ~~No. 160~~Topic 810 is effective asfor offinancial ~~the~~statements issued ~~beginning~~for ofinterim anand ~~entity’s~~annual ~~first fiscal~~periods ~~year~~ending after ~~December~~November 15, ~~2008~~2009. The adoption of the standard, effective February 1, ~~2009~~2010, is not expected to have a significant impact on the Corporation’s consolidated financial statements.

OnIn ~~March~~June 192009, ~~2008,~~ the FASB ~~issued~~updated ~~SFAS~~ASC ~~No. 161~~Topic 105, ~~Disclosures~~Generally ~~about~~Accepted ~~Derivative~~Accounting ~~Instruments~~Principles. ~~and~~ASC Topic ~~Hedging~~105 ~~Activities~~will —become anthe ~~Amendment~~source of ~~FASB~~authoritative ~~Statement No~~U. ~~133~~S. ~~SFAS~~GAAP ~~No. 161~~recognized ~~enhances~~by ~~required disclosures~~the ~~regarding~~FASB ~~derivatives~~to ~~and~~be ~~hedging~~applied ~~activities, including enhanced disclosures regarding~~by ~~how:~~nongovernment ~~(a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No~~entities. ~~133,~~ ~~Accounting~~ASC ~~for~~Topic ~~Derivative~~105 ~~Instruments~~also ~~and~~modifies ~~Hedging Activities;~~the ~~and~~GAAP ~~(c) derivative~~hierarchy ~~instruments~~to ~~and~~include ~~related~~only ~~hedged~~two ~~items affect an entity’s financial~~levels ~~position,~~of ~~financial~~GAAP: ~~performance,~~authoritative and ~~cash flows~~non-authoritative. ~~SFAS~~ASC ~~No. 161~~Topic 105 is effective for ~~fiscal~~financial ~~years and~~statements issued for interim and annual periods ~~beginning~~ending after ~~November~~September 15, ~~2008~~2009. ~~Early application is encouraged.~~ The ~~adoption of the~~ standard, ~~effective~~which ~~February~~was adopted November 1, 2009, isdid not ~~expected to~~ have a significant impact on the ~~Corporation~~ Company’s consolidated financial statements.

InNOTE ~~May 2008,~~10 ~~the~~— ~~FASB~~ADDITIONAL issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of the standard is not expected to have a significant impact on the Corporation’s consolidated financial statements. INFORMATION

InAt ~~May 2008~~October 31, 2009, the ~~FASB~~Company ~~issued~~had ~~SFAS~~total ~~No. 163,~~secured ~~Accounting~~debt ~~for~~of ~~Financial~~approximately ~~Guarantee~~$12.9 ~~Insurance~~million ~~Contracts~~due ~~- An~~within ~~Interpretation~~12 ofmonths. It ~~FASB~~had ~~Statement~~also ~~No. 60.~~incurred ~~SFAS~~a ~~No. 163~~Loss ~~applies~~from toOperations ~~financial~~of ~~guarantee~~$2.5 ~~insurance~~million through ~~contracts~~the ~~issued~~first bythree ~~insurance~~quarters ~~enterprises,~~of ~~including~~2010. The ~~the~~Company ~~recognition~~may ~~and~~not ~~measurement~~be ofable ~~premium revenue~~to ~~and~~obtain ~~claim~~an ~~liabilities.~~extension Itof ~~also~~our ~~requires~~loan ~~expanded~~agreements ~~disclosures~~or ~~about~~replacement ~~financial~~financing ~~guarantee~~on ~~insurance~~the ~~contracts.~~same ~~SFAS~~or ~~No. 163~~substantially issimilar ~~effective~~terms ~~for~~to ~~fiscal~~our ~~years~~existing ~~and~~loan ~~interim~~agreements. Because ~~periods~~the ~~beginning~~global capital ~~after~~and ~~December 15,~~credit ~~2008,~~markets ~~except~~have ~~for~~been ~~the~~severely ~~disclosure requirements~~constrained, ~~which~~additional ~~are~~financing ~~effective~~may ~~the~~contain ~~first~~more onerous debt ~~period~~covenants ~~(including~~that ~~interim~~may ~~periods)~~be ~~beginning~~difficult ~~after~~for ~~May 23,~~the ~~2008~~Company to achieve. Inability ~~The~~to ~~adoption~~obtain ofloan ~~the~~extensions ~~standard,~~or ~~effective~~replacement ~~February 1,~~financing ~~2009,~~upon isexpiration ~~not~~of ~~expected~~our tocurrent ~~have~~loan aagreement ~~significant~~could ~~impact~~result onin the ~~Corporation~~Company’s inability ~~consolidated~~to ~~financial~~continue ~~statements~~as a going concern.

If the Company is unsuccessful in its efforts to refinance its debt and return to profitability, the Company may be required to adjust the carrying value of certain assets and / or the amounts and classification of liabilities to reflect the Company’s inability to realize its assets and satisfy its liabilities in the normal course of business. The financial statements do not include any such adjustments relating to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary. In order to mitigate these issues, we have reduced our overhead staff and are actively pursuing strategic alternatives, which may include a sale or other combination of the Company, sale of assets, managing our continuing operations, and seeking a refinancing of our debt.


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

The ~~statements~~following ~~contained~~discussion inshould this Management’s Discussion and Analysis of the Consolidated Condensed Financial Statements and other sections of this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Corporation’s or Corporation management’s expectations, hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on the Corporation’s current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” and similar expressions are intended to identify forward-looking statements. There can be noread assurance that future developments and actual actions or results affecting the Corporation will be those that the Corporation has anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the Corporation’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the continuing validity of the underlying assumptions and estimates of total forecasted project revenues, costs and profits and project schedules; the outcomes of pending or future litigation, arbitration or other dispute resolution proceedings; the availability of borrowed funds on terms acceptable to the Corporation; the Corporation’s ability to remain in ~~compliance~~conjunction with the ~~covenants~~Unaudited inCondensed ~~its credit agreement; the~~Consolidated ~~ability~~Financial toStatements retain certain members of management; the ability to obtain surety bonds to secure the Corporation’s performance under certain construction contracts; possible labor disputes or work stoppages within the construction industry; changes in federal and ~~state~~Notes ~~appropriations~~thereto ~~for infrastructure~~appearing ~~projects;~~elsewhere ~~possible changes or developments~~ in ~~worldwide~~this or domestic political, social, economic, business, industry, market and regulatory conditions or circumstances; and actions taken or not taken by third parties including the Corporation’s customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials; and other risks and uncertainties discussed under the heading “Risk Factors” in the Corporation’s Form 10-K filed with the SEC for the fiscal year ended January 31, 2008 (the “2008 Form 10-K”)report. ~~The Corporation undertakes no obligation to publicly update or revise~~ ~~any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.~~

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

This Management’s Discussion and Analysis of the Consolidated Condensed Financial Statements should be read in conjunction with our annual report on Form 10-K for the year ended January 31, 2009 (the “2009 Form 10-K”). The statements contained in this Management’s Discussion and Analysis of the Consolidated Condensed Financial Statements and other sections of this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements regarding the Corporation’s or Corporation management’s expectations, hopes, beliefs, intentions or strategies regarding the future. These forward-looking statements are based on the Corporation’s current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” and similar expressions are intended to identify forward-looking statements. There can be no assurance that future developments and actual actions or results affecting the Corporation will be those that the Corporation has anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the Corporation’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the ability to secure additional financing to enable us to satisfy our obligation for our Subordinated Note on August 31, 2010, current economic conditions, including conditions in the credit markets which may adversely affect the ability of our customers to obtain funding for projects which require our services and our ability to collect receivables, the continuing validity of the underlying assumptions and estimates of total forecasted project revenues, costs and profits and project schedules; the outcomes of pending or future litigation, arbitration or other dispute resolution proceedings; the availability of borrowed funds on terms acceptable to the Corporation or that borrowed funds will be available to the Corporation at all; the Corporation’s ability to remain in compliance with the covenants in its loan agreement; the ability to retain certain members of management; the ability to obtain surety bonds to secure the Corporation’s performance under certain construction contracts; possible labor disputes or work stoppages within the construction industry; changes in federal and state appropriations for infrastructure projects; possible changes or developments in worldwide or domestic political, social, economic, business, industry, market and regulatory conditions or circumstances; and actions taken or not taken by third parties including the Corporation’s customers, suppliers, business partners, and competitors and legislative, regulatory, judicial and other governmental authorities and officials; and other risks and uncertainties discussed under the heading “Risk Factors” in the Corporation’s 2009 Form 10-K. The Corporation undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

OVERVIEW

We provide environmental and specialty contracting services including asbestos and lead abatement, microbial remediation, disaster response, loss mitigation and reconstruction, demolition and related services throughout the United States. During the ~~six~~nine months ended ~~July~~October 31, ~~2008~~2009, ~~revenues~~ revenues from disaster response, loss mitigation and reconstruction were 3944.59% of total revenues compared ~~vs.~~to 6055.51% of revenues from abatement of asbestos. The Company has broadened its offering of services in recent years to include a number of complementary services which utilize its ~~existing~~ existing infrastructure and personnel. Cash flows from contracting services are primarily generated from periodic progress billings on large contracts under which the Corporation performs services and single project billings on small short duration projects.

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

The Corporation continues to manage its projects to minimize risk and the negative financial impact upon the Corporation. More information on risks and the Corporation’s efforts to manage risks is available in Item 1A under the caption “Risk Factors” in the Corporation’s ~~2008~~2009 Form 10-K and supplemented elsewhere in this report. Additionally, please refer to the Corporation’s ~~2008~~2009 Form 10-K for a discussion of the components of the significant categories in the Corporation’s consolidated Statement of Operations.

CRITICAL ACCOUNTING POLICIES

In general, there have been no significant changes in the Corporation’s critical accounting policies since January 31, 2008. For a detailed discussion of these policies, please see Item 7 of the Corporation’s 2008 Form 10-K.

CRITICAL ACCOUNTING POLICIES

In general, there have been no significant changes in the Corporation’s critical accounting policies since January 31, 2009. For a detailed discussion of these policies, please see Item 7 of the Corporation’s 2009 Form 10-K.

RESULTS OF OPERATIONS

Three Months Ended ~~July~~October 31, ~~2008~~2009 Compared to Three Months Ended ~~July~~October 31, ~~2007~~2008

During the three months ended ~~July~~October 31, ~~2008~~2009, the Corporation’s contract revenues decreased by 12 59.91% to $2311.25 million compared to $2628.61 million in the three months ended ~~July~~October 31, ~~2007~~2008. The ~~decrease~~ decrease was ~~primarily~~ due, in part, to lower ~~revenues~~sales volumes as a result of lower capital spending by our customer base driven by difficult economic conditions. Specifically, we had a reduction of approximately $111.36 million in revenues generated from non-asbestos ~~abatement~~ projects and approximately $25.0 million for ~~non-~~asbestos abatement projects during the three months ended ~~July~~October 31, ~~2008~~2009, as ~~compared~~ compared to the same period last year. Revenues were also negatively impacted by the lack of natural disasters in the current quarter versus revenues generated from hurricanes Ike and Gustav in the prior year quarter. The Corporation’s gross margin decreased to $3.1.9 million in the ~~second~~third quarter of fiscal ~~2009~~2010 as compared to $4.04 million in the ~~second~~third quarter of fiscal ~~2008~~ 2009 largely due to the lower revenues ~~and field margin~~ generated during the three months ended ~~July~~October 31, ~~2008~~ 2009. Gross margin as a percentage of revenue ~~decreased~~increased to 1316.25% for the current quarter from 15.27% for the prior year quarter. Field ~~margins~~margin, which ~~are~~is defined as the difference between contract revenues and direct field costs, ~~decreased~~increased to 2332.72% of revenue for the current quarter, from 2523.68% in the prior year fiscal quarter. ~~The decrease in the field margin percentage is due to increased costs on one significant contract resulting in a lower profit margin than originally estimated.~~ Other direct costs ~~decreased~~were to $21.47 million or 1014.58% of revenue for the current ~~quarter~~ quarter as compared to $2.83 million or 108.42% of revenue for the prior year quarter. The dollar decrease is due to lower personnel and related costs and the closure of certain offices formerly maintained by the Company since the end of the prior year period ~~as well as the reduced level of revenues~~.

Selling, general and administrative expenses ~~increased~~decreased to $32.67 million in the three months ~~ended~~ ~~July~~ended October 31, ~~2008~~2009, as compared to $3.02 million in the three months ended ~~July~~October 31, ~~2007~~2008. The ~~increase~~ decrease is primarily due to areduced ~~one~~personnel ~~time~~costs ~~charge of $0.3 million to bad debt expense for the settlement of contract claims~~ and atravel ~~higher level of sales and marketing costs~~expenses. As a percentage of ~~contract~~ contract revenues, selling, general and administrative ~~expense~~expenses in the current fiscal quarter increased by 4 12.41% to 1523.65% from 11.24% in the prior year fiscal quarter as a result of the above and a lower revenue base.

The Corporation reported a loss from operations of ($~~564,000~~0.7) million for the three months ended ~~July~~ October 31, ~~2008~~ 2009, compared to income from operations of $1~~,050,000~~.2 million for the three months ended ~~July~~ October 31, ~~2007~~2008, as a direct result of the factors discussed above.

Interest expense decreased to $~~202~~219,000 in the current quarter as compared to $~~309~~232,000 in the same quarter of a year ago as a result ~~lower~~of ~~borrowings~~the ~~outstanding~~exchange ~~and~~of ~~lower~~preferred stock to debt offset by lower interest rates and lower borrowing on the line of credit during the three months ended ~~July~~October 31, ~~2008~~ 2009.

Non-cash interest expense for preferred dividends and accretion of the discount relates to the private placement in July 2005 of $5.5 million of redeemable convertible preferred stock and the subsequent issuance of $1.~~375~~4 million of redeemable convertible preferred stock from the exercise of of the over-allotment option. As the preferred shares are mandatorily redeemable, the actual ~~dividend~~ dividend and the accretion of the discount associated with the preferred stock are required to be ~~reflected~~ reflected as interest expense. ~~The~~Due ~~current~~to ~~fiscal period had a $260,000 expense, which includes~~ the ~~actual~~execution ~~dividend~~ of ~~$76,000~~the ~~and~~Exchange ~~the~~Agreement ~~accretion~~there ofwas ~~the~~no ~~discount~~interest ~~associated~~expense recorded ~~with~~for the ~~preferred stock~~current offiscal ~~$184,000~~quarter. The prior year fiscal ~~period~~quarter had a $~~219~~271,000 expense, which included the actual dividend of $76,000, and the accretion of the discount associated with the preferred stock of $~~143~~195,000.

During the quarter ended ~~July~~October 31, ~~2008~~2009, there was no current federal or state income tax provision and no deferred tax benefit recorded. During the quarter ended October 31, 2008, the Corporation recorded a $45449,000 deferred tax provision and an $86,000 state income tax benefit. At ~~provision~~October 31, ~~and~~2009, the gross deferred tax assets totaled $~~323~~6.4 million. At October 31,~~000~~ 2009, it was determined that the recognition of the deferred income tax ~~benefit~~assets would not all be realized. Therefore, a valuation allowance of $2.5 million has been recorded and the net deferred tax assets totaled $3.9 million at October 31, 2009.

~~During~~Nine ~~the~~months ~~quarter~~ ended ~~July~~October 31, ~~2007,~~2009 ~~the~~Compared ~~Corporation~~to ~~recorded~~Nine amonths ~~$54,000~~ended ~~current federal tax provision~~October 31, ~~a $127,000 state income tax provision and $17,000 deferred tax benefit.~~2008

~~Six~~During ~~Months~~the ~~Ended~~nine ~~July~~months ended October 31, 2009, the Corporation’s contract revenues decreased by 46.6% to $36.9 million compared to $69.1 million in the nine months ended October 31, 2008. ~~Compared~~The decrease was due, in part, to ~~Six~~lower ~~Months~~sales ~~Ended~~volumes ~~July~~as a result of lower capital spending by our customer base driven by difficult economic conditions. Specifically, we had a reduction of approximately $15.7 million in revenues generated from non-asbestos projects and approximately $16.5 million for asbestos abatement projects during the nine months ended October 31, ~~2007~~2009, as compared to the same period last year. Revenues were also negatively impacted by the lack of natural disasters in the current year versus revenues generated from hurricanes Ike and Gustav in the prior year. In addition, settlement of a contract claim resulted in a $0.8 million reduction in revenue in the current fiscal period compared to the prior year fiscal period. The claim settlement was for a contract completed in a prior year. The Corporation’s gross

During the six months ended July 31, 2008, the Corporation’s contract revenues decreased by 15.3% to $40.9 million compared to $48.3 million in the six months ended July 31, 2007. The decrease was primarily due to lower revenues of $7.0 million generated from asbestos abatement projects during the six months ended July 31, 2008, as compared to the same period last year. In addition, one asbestos abatement project accounted for approximately 12.4% of total revenues for the six months ended July 31, 2007, as compared to the largest project generating only 9.5% of total revenues during the six months ended July 31, 2008. The Corporation’s gross margin decreased to $5.3 million in the current six month period as compared to $7.7 million in the prior year six month period largely due to the lower revenues and field margin generated during the six months ended July 31, 2008. Gross margin as a percentage of revenue decreased to 12.9% for the current six month period from 16.0% for the prior year six month period. Field margins decreased to 24.9% of revenue for the current six month period, from 27.5% in the prior year six month period. The decrease in the field margin percentage is due to increased costs on one significant contract resulting in a lower profit margin than originally estimated. Other direct costs decreased to $4.9 million or 12.0% of revenue for the current six month period as compared to $5.6 million or 11.5% of revenue for the prior year six month period. The dollar decrease is due to the closure of certain offices formerly maintained by the Company since the end of the prior year period as well as the reduced level of revenues.

~~Selling,~~margin ~~general and administrative expenses increased~~ decreased to $75.12 million in the ~~six~~current ~~months~~nine ~~ended~~month ~~July 31,~~period ~~2008,~~ as compared to $59.87 million in the ~~six~~prior year nine month period largely due to the lower revenues generated during the nine months ended ~~July~~October 31, 2009. ~~2007~~Gross margin as a percentage of revenue remained constant at 14.0% ~~The~~for ~~increase~~the iscurrent nine ~~principally~~month ~~due~~period toand ~~higher~~the ~~sales~~prior &year ~~marketing~~nine ~~costs~~month period. Field margin, ~~compensation~~which ~~costs~~is ~~for~~defined as the difference ~~new~~between ~~chief~~contract ~~financial officer~~revenues ~~hired~~and ~~May 23,~~direct ~~2007,~~field costs, ~~related~~increased to 28.7% of revenue for the current ~~Corporation’s~~nine ~~rebranding~~month period, ~~higher~~from ~~legal~~24.5% ~~costs~~in ~~and bad~~the ~~debt~~prior ~~expense~~year nine month period. AsAdjusting afor ~~percentage~~the ofclaim settlement ~~contract~~revenue ~~revenues~~decrease, ~~selling,~~the ~~general~~field ~~and~~margin ~~administrative~~for the current period would have been 30.2%. Other ~~expense~~direct incosts were $5.4 million or 14.6% of revenue for the current ~~six~~nine month period ~~increased~~as bycompared 5to $7.3% million toor 1710.36% ~~from~~of ~~12.0%~~revenue infor the prior year ~~six~~ nine month period. asThe adollar ~~result~~decrease is due to lower personnel and related costs and the closure of certain offices formerly maintained by the Company ~~above~~since ~~and~~the aend ~~lower~~of ~~revenue~~the ~~base~~prior year period.

~~The~~Selling, ~~Corporation~~general ~~reported~~and aadministrative ~~loss~~expenses ~~from~~decreased ~~operations~~to ~~of (~~$17.8 million in the nine months ended October 31,~~794~~ 2009,~~000)~~ ~~for~~as compared to $10.3 million in the ~~six~~nine months ended ~~July~~October 31, 2008. The decrease is primarily due to reduced personnel costs, ~~compared~~marketing, travel and bad debt expenses offset by higher legal services, which were attributed to ~~income~~the ~~from~~revisions ~~operations~~in the debt instruments and settlement of $1claims. As a percentage of contract revenues,~~929~~ selling,~~000~~ ~~for~~general and administrative expenses in the ~~six~~current ~~months~~nine ~~ended~~month ~~July 31,~~period ~~2007,~~increased by 6.2% to 21.1% from 14.9% in the prior year nine month period as a ~~direct~~ result of the ~~factors~~above ~~discussed~~and ~~above~~a lower revenue base.

~~Interest~~The ~~expense~~Corporation ~~decreased~~reported toa loss from operations of ($~~405,000~~2.6) inmillion for the ~~current~~nine ~~six~~months ~~month~~ended October 31, ~~period~~2009, as compared to ~~$580,000~~a ~~in the~~loss ~~same~~from ~~six~~operations ~~month~~of ~~period~~($0.6) ofmillion afor ~~year~~the ~~ago~~nine months ended October 31, 2008, as a direct result ~~lower~~of ~~borrowings~~the ~~outstanding~~factors ~~and~~discussed ~~lower~~above. ~~interest~~Adjusting for the claim ~~rates~~settlement, ~~during~~loss from operations in the ~~six~~current ~~months~~nine ~~ended~~month ~~July 31,~~period ~~2008~~would have been ($2.0) million.

~~Non-cash~~Interest ~~interest~~ expense ~~for~~decreased ~~preferred dividends and accretion of the discount relates~~ to ~~the private~~$629,000 ~~placement~~ in ~~July 2005 of $5.5 million of redeemable convertible preferred stock and~~ the ~~subsequent~~ ~~issuance~~current ofnine ~~$1.375 million~~month ofperiod ~~redeemable~~as ~~convertible~~compared ~~preferred~~to ~~stock from the exercise of the over-allotment option. As the preferred shares are mandatorily redeemable~~$636,000 ~~the actual~~in ~~dividend and~~ the ~~accretion~~prior ofyear ~~the~~nine ~~discount associated with the preferred stock are required to be reflected as interest expense. The current six~~ month period ~~had~~as a ~~$508,000~~result ~~expense, which includes the actual dividend~~ of ~~$152,000 and~~ the ~~accretion~~exchange of ~~the~~preferred ~~discount~~stock ~~associated~~to ~~with~~debt ~~the~~offset ~~preferred~~by ~~stock~~lower ofinterest ~~$356,000.~~rates ~~The~~and ~~prior~~lower ~~six~~borrowing ~~month~~on ~~period had a $429,000 expense, which included~~ the ~~actual dividend~~line of ~~$152,000,~~credit ~~and~~during the ~~accretion~~nine ofmonths ~~the~~ended ~~discount associated with the preferred stock of~~October ~~$277~~31,~~000~~ 2009.

~~During~~Non-cash interest expense for preferred dividends and accretion of the ~~six~~discount ~~months~~relates ~~ended~~to the private placement in July ~~31,~~2005 ~~2008~~of $5.5 million of redeemable convertible preferred stock and the subsequent issuance of $1.4 million of redeemable convertible preferred stock from the exercise of the over-allotment option. As the preferred shares are mandatorily redeemable, the ~~Corporation~~actual ~~recorded~~dividend and the accretion of the discount associated with the preferred stock are required to be reflected as interest expense. The current nine month period had a $45484,000 ~~state~~expense, ~~income~~which ~~tax~~includes the ~~provision~~actual dividend of $102,000 and the accretion of the discount associated with the preferred stock of $~~840~~382,000. ~~deferred~~The ~~tax~~prior ~~benefit~~year nine month period had a $779,000 expense, which included the actual dividend of $228,000, and the accretion of the discount associated with the preferred stock of $551,000.

During the ~~six~~nine months ended ~~July~~October 31, ~~2007~~2009, there was no current federal or state income tax provision and no deferred tax benefit recorded. During the nine months ended October 31, 2008, the Corporation recorded a $17391,000 ~~current~~deferred ~~federal~~ tax benefit, and a $~~159~~40,000 state income tax ~~provision~~benefit. ~~and~~At October 31, 2009, the gross deferred tax assets totaled $~~111~~6.4 million. At October 31,~~000~~ 2009, it was determined that the recognition of the deferred income tax ~~provision~~assets would not all be realized. Therefore, a valuation allowance of $2.5 million has been recorded and the net deferred tax assets totaled $3.9 million at October 31, 2009.

FINANCIAL CONDITION

Liquidity and Capital Resources

During the ~~six~~nine months ended ~~July~~October 31, ~~2008~~2009, the Corporation’s cash and cash equivalents decreased by $76109,000 to $14205,000. The decrease in cash during the period is attributable to outflows ~~inflows~~ from ~~operating~~ investing activities of $20148,000 and ~~inflows from~~ financing activities of $509,695,000 offset by ~~outflows~~ ofinflows ~~$146,000~~ from ~~investing~~operating activities of $9,734,000.

Cash ~~generated~~provided by operating activities totaled $~~20,000~~9.7 million in the ~~six~~nine months ended ~~July~~October 31, ~~2008~~ 2009. The bulk of the inflow was due to ~~non-cash~~a ~~expenses~~decrease in working capital of $~~1,247,000~~11.4 million ~~offset~~and by the change ~~net~~in ~~loss~~non-cash expenses of $1~~,875,000, further~~.9 million offset by athe ~~decrease~~net inloss ~~working capital~~ of $~~648,000~~3.6 million. The change in working capital is primarily due to the ~~increases~~decreases in contracts receivable of $19.5 million,~~398,000~~ ~~and~~ costs in excess of billings of $1.9 million,~~079,000~~ ~~offset~~and byother ~~the~~current ~~increases~~assets ~~in accounts payable~~ of $~~1,512,000~~2.7 million ~~and~~offset ~~accrued liabilities~~by ~~of $629,000 and~~ the decrease in ~~other~~accounts ~~current~~payable ~~assets~~ of $~~740,000~~2.3 million. The ~~increase~~decreases in contracts receivable, costs in excess of billings, and accounts payable is due to ~~increased~~decreased revenues ~~from~~ ~~the~~during ~~first quarter of fiscal 2009 to~~ the ~~second~~nine ~~quarter~~months ofended ~~fiscal~~October 31, 2009.

Investing activities cash outflows included $~~153~~136,000 ~~primarily~~ for the purchase of property, plant and equipment and ~~equipment~~a $103,000 increase in other assets offset by $91,000 in proceeds from the sale of fixed assets.

Financing activities cash ~~inflows~~outflows consisted of $~~807,000~~7.2 million net ~~proceeds~~payments ~~from~~on the line of credit ~~offset~~and ~~by the~~ payment for the insurance premium financing of $~~759,000~~2. ~~On July~~4 31, 2008, the Company was not in compliance with all of the financial covenants of the line of credit agreement however, as part of the amendment of the line of credit facility the Company obtained a waiver from Huntington Bank waiving the financial covenants as of July 31, 2008million.

At ~~July~~October 31, ~~2008~~2009, the Corporation’s backlog totaled $4717.38 million ($3010.65 million on fixed fee contracts and $~~16.~~7.3 million on time and materials or unit price contracts). At ~~July~~October 31, ~~2008~~2009, ~~our~~ our backlog consisted of $328.9 3 million of booked orders and an additional $149.45 million of open ended purchase orders or orders in final negotiation stage which will likely become booked orders in either the ~~third~~fourth quarter of fiscal 2010 or ~~fourth~~the first quarter of fiscal ~~2009~~2011.

At July 31, 2008, the Corporation had approximately $7.7 million of costs and estimated earnings in excess of billings on uncompleted contracts. Included in this amount is approximately $4.2 million of costs related to contract claims and unapproved change orders. Of the $23.8 million in contracts receivable, approximately $2.0 million of contracts receivable represent disputed or litigated items. The Corporation expects to process change orders or pursue contract claims for at least the full amount of these costs relative to the aforementioned contracts.

InAt ~~connection with the private placements in July~~October ~~2005~~31, ~~the~~2009, ~~Company entered into registration rights agreements with~~ the ~~Common~~Corporation ~~Stockholders~~had ~~and~~approximately ~~Preferred Stockholders~~$2.9 million ~~Under these registration rights agreements, the Company agreed to file a registration statement for the purpose~~ of ~~registering~~costs ~~the resale of the common stock~~ and ~~the~~estimated ~~shares of common stock underlying the~~earnings ~~convertible securities we issued~~ in ~~the~~excess ~~private~~of ~~placements.~~billings ~~The~~on ~~registration~~uncompleted ~~rights agreements require the Company to keep the registration statement effective for a specified period of time~~contracts. In ~~the~~Included ~~event~~in ~~that~~this ~~the~~amount ~~registration statement~~ is ~~not~~approximately ~~filed or declared effective within the~~$0.8 ~~specified~~million ~~deadlines or is not effective for any period exceeding a permitted Black-Out Period (45 consecutive Trading Days but no more than an aggregate~~ of 75costs ~~Trading~~related ~~Days during any 12-month period), then the Company will be obligated~~ to ~~pay~~contract ~~the~~claims ~~Preferred~~ and ~~Common~~unapproved ~~Stockholders~~change uporders. toOf ~~12% of~~the ~~their purchase price per annum~~$13. ~~On November~~7 ~~21,~~million ~~2005 the Company Registration Statement was~~in ~~declared~~contracts ~~effective~~receivable, byapproximately ~~the SEC~~$1.9 million As of ~~July 31,~~contracts ~~2008,~~receivable ~~the~~represent ~~Company~~disputed ~~has utilized forty-five of the~~or ~~permitted~~litigated ~~aggregate Black-Out days~~items. ~~Other~~The ~~than~~Corporation ~~the~~expects ~~aforementioned~~to ~~monetary~~process ~~penalty,~~change ~~there~~orders ~~are no provisions requiring cash payments~~ or ~~settlements~~pursue ifcontract ~~registered~~claims ~~shares~~for ~~cannot be provided upon~~at ~~conversion/exercise~~least or the ~~shareholders~~full ~~cannot~~amount ~~sell~~of ~~their~~these ~~shares~~costs ~~due~~relative to athe ~~blackout~~aforementioned ~~event~~contracts.

~~Outstanding~~As ~~shares~~ of ~~preferred~~October 31, ~~stock~~2009, ~~that~~we have ~~not~~a ~~been~~$14.5 million ~~converted~~loan toagreement ~~common~~from ~~stock~~our atfinancial ~~the~~institution, ~~maturity~~The ~~date~~Huntington ofBank ~~July 1,~~National ~~2009~~Association ~~are~~(successor ~~payable~~ in ~~cash~~interest ~~along~~to ~~with~~Sky ~~the~~Bank). ~~related~~As 8% per ~~annum~~the ~~dividend.~~terms ~~Thus,~~of the ~~preferred~~loan ~~shares~~agreement, ~~and~~subsequent ~~the~~to ~~related~~October 31, ~~amounts~~2009, ~~for~~the ~~accrued~~maximum ~~dividends~~loan ~~have~~amount ~~been~~was ~~classified~~reduced into ~~current~~$14.0 ~~liabilities~~million. asWe rely significantly upon our revolving line of ~~July 31,~~credit ~~2008.~~in order to operate our business. The ~~availability~~line of ~~resources~~credit toand ~~make~~term ~~the~~loan ~~payments~~is ~~due~~secured onby ~~July 1, 2009,~~a ~~will~~“blanket” ~~depend~~security interest in our assets and a mortgage on the ~~Corporation’s~~real ~~future~~estate ~~earnings,~~owned ~~cash~~by ~~flow~~us. ~~and~~The ~~its~~loan ~~ability~~agreement tobecomes ~~secure additional~~due ~~financing~~on August 3, 2010.

~~Subject~~On toMay 14, ~~securing funds for the redemption obligation~~2009, the ~~Corporation~~Company ~~believes funds generated by operations~~ and ~~amounts~~its ~~available~~sole ~~under~~remaining ~~its~~preferred ~~existing~~shareholder ~~credit~~entered ~~facility~~into ~~will~~the beExchange Agreement ~~sufficient~~pursuant to ~~finance~~ ~~its~~which ~~current~~the ~~operations~~Series C ~~and~~Convertible ~~other~~Preferred ~~ordinary~~Stock ~~course~~were ~~commitments~~surrendered and exchanged for the ~~foreseeable~~Subordinated ~~future. However,~~Note ~~there~~of ~~can~~$5.0 million bedollars nodue ~~assurance~~to ~~that~~the ~~such~~subordinated ~~funding~~lender ~~will~~on ~~be available~~August 31, ~~as our ability to generate~~ ~~cash~~2010, ~~flows from operations~~ and ~~our ability to access funding under~~ the ~~revolving~~Additional ~~credit~~Note ~~facilities may~~of be$0.6 million ~~impacted~~possibly issued by ~~a variety of business~~January 15, ~~economic~~2010, ~~legislative, financial and other factors which~~with ~~may~~substantially ~~be outside~~ the ~~Corporation’s~~same ~~control.~~terms ~~Additionally,~~in ~~while~~certain ~~the~~circumstances ~~Corporation~~(see ~~currently~~Note ~~has significant~~7, ~~uncommitted~~Exchange ~~bonding~~of ~~facilities,~~Series C ~~primarily to support various commercial provisions in~~Preferred ~~the~~Stock). ~~Corporation’s~~The ~~contracts,~~Subordinated aNotes ~~termination~~are orsubordinate ~~reduction~~only ofto ~~these bonding facilities could result in~~ the ~~utilization~~debt ofto ~~letters~~Huntington ~~of credit in lieu of performance bonds~~Bank, ~~thereby reducing~~ the ~~Corporation’s~~ ~~available~~terms ~~capacity under the revolving credit facilities. There can be no assurance~~of ~~that~~which ~~such~~are ~~facilities~~set ~~will~~forth bein ~~available~~a atsubordinated ~~reasonable~~and ~~terms~~intercreditor ~~to service the Corporation’s ordinary course obligations~~agreement.

At October 31, 2009, the Company had total secured debt of approximately $12.9 million due within 12 months. It had also incurred a Loss from Operations of $2.5 million through the first three quarters of 2010. The Company may not be able to obtain an extension of our loan agreements or replacement financing on the same or substantially similar terms to our existing loan agreements. Because the global capital and credit markets have been severely constrained, additional financing may contain more onerous debt covenants that may be difficult for the Company to achieve. Inability to obtain loan extensions or replacement financing upon expiration of our current loan agreement could result in the Company’s inability to continue as a going concern.

If the Company is unsuccessful in its efforts to refinance its debt and return to profitability, the Company may be required to adjust the carrying value of certain assets and / or the amounts and classification of liabilities to reflect the Company’s inability to realize its assets and satisfy its liabilities in the normal course of business. The financial statements do not include any such adjustments relating to the realization of the carrying value of assets or the amounts and classifications of liabilities that might be necessary. In order to mitigate these issues, we have reduced our overhead staff and are actively pursuing strategic alternatives, which may include a sale or other combination of the Company, sale of assets, managing our continuing operations, and seeking a refinancing of our debt.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, the Company has elected scaled disclosure reporting obligations and therefore is not required to provide the information in ~~this~~ Item 3.

ITEM 4. CONTROLS AND PROCEDURES

Prior to the filing of this Report on Form 10-Q, an evaluation was performed under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this Report on Form 10-Q, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure.

During the fiscal quarter ended ~~July~~October 31, ~~2008~~2009, there were no changes in the Company’s internal control procedures with respect to financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

On July 15, 2008, the Annual Meeting of the Stockholders of PDG Environmental, Inc was held in Pittsburgh, PA. There were 20,826,109 shares of common stock issued and outstanding as of June 9, 2008, the record date for the meeting.

At the meeting, all of the management’s nominees were elected to the Board of Directors for 1-year terms expiring at the Annual Meeting of the Stockholders in 2009. The results of the voting were as follows:

	Total Votes Cast		For		Against		Withheld
John C. Regan		15,171,069		13,997,796		0		1,173,273
James D. Chiafullo		15,171,069		13,929,454		0		1,241,615
Richard A. Bendis		15,171,069		13,996,446		0		1,174,623
Edwin J. Kilpela		15,171,069		13,999,141		0		1,171,928
Edgar Berkey		15,171,069		13,996,266		0		1,174,803

The final matter presented at the meeting was the ratification of the selection of Malin Bergquist & Company, LLP as the Corporation’s independent registered public accounting firm for fiscal year 2009. On this matter, the results of the voting were as follows:

Votes For			14,483,500
Votes Against			332,922
Abstained			354,647

ITEM 6. EXHIBITS

(a) The following exhibits are being filed with this report:

Exhibits
Exhibit
Number		Description
10.8.2		Third Amendment to Amended and Restated Loan Agreement
31.1		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002, filed herewith.
31.1		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002
31.2		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002, filed herewith.
31.2		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002
32		Certification Pursuant to 18 U.S.C. Section 1350, as amended, pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, filed herewith.
32		Certification Pursuant to 18 U.S.C. Section 1350, as amended Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

2120

SIGNATURES

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

PDG ENVIRONMENTAL, INC. By /s/ John C. Regan John C. Regan ~~Chairman and~~ Chief Executive Officer By /s/ ~~Nicola~~John ~~Battaglia~~F. ~~Nicola~~Kelly ~~Battaglia~~John F. Kelly Chief Financial Officer

Date: ~~September~~December 1223, ~~2008~~2009

2221

EXHIBIT INDEX
Exhibit No. and Description

Exhibit 10.8.2		Third Amendment to Amended and Restated Loan Agreement
Exhibit 31.1		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 31.1		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 31.2		Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of The Sarbanes-Oxley Act of 2002
Exhibit 32		Certification Pursuant to 18 U.S.C. Section 1350, as amended, pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 32		Certification Pursuant to 18 U.S.C. Section 1350, as amended Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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