10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 2)

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

¨ ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

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

Commission File Number 000-07152

DEVCON INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

FLORIDA	59-0671992	3270;7381
(State Or Other Jurisdiction Of Incorporation Or Organization)	(I.R.S. Employer Identification No.)	(Primary Standard Industrial Classification Code Number)

595 SOUTH FEDERAL HIGHWAY, SUITE 500

BOCA RATON, FLORIDA 33432

(Address of principal executive offices)

(561) 208-7200

(Registrant’s telephone number, including area code)

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

Common Stock, $0.10 par value

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

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act.

Large Accelerated Filer    ¨ Accelerated Filer    ¨ Non-Accelerated Filer    x

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

As of March 30, 2007, the number of shares of the registrant’s Common Stock outstanding was 6,219,159. The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2006 was approximately $24,106,607, based on a closing sale price of $6.35 for the Common Stock on such date. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Further, the classification of affiliate specifically excludes shares beneficially owned by virtue of voting rights granted pursuant to a proxy, but not owned of record, by Coconut Palm Investors I, Ltd. Such determinations should not be deemed to be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

None.

EXPLANATORY NOTE

Devcon International Corp. (the “Company”) is filing this Amendment No. 2 to its Annual report on Form 10-K/A for the fiscal year ended December 31, 2006 (the “Original Filing”). This Amendment No. 2 is being filed to restate the Consolidated Balance Sheet as of December 31, 2006 and the related Consolidated Statements of Operations and Cash Flows for the year ended December 31, 2006. This Form 10-K/A also reflects (1) the restatement of “Selected Financial Data” in Item 6 for the year ended December 31, 2006, (2) the amendment in Item 7 of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” “Other Income (Expense)” presented in the Company’s Form 10-K/A for the year ended December 31, 2006 as it relates to the years ended December 31, 2006 and 2005, and (3) the restatement of quarterly financial information in Note 26, Selected Quarterly Data, for the quarter ended December 31, 2006.

Background of Restatement

The Company was in the process of reviewing the fair market valuation and accounting treatment of certain derivative liabilities as well as the carrying value of the related Series A Convertible Preferred Stock when it was noted that the fair valuation model applied did not adequately capture and value certain features of the conversion option embedded within the Series A Convertible Preferred Stock. The substantive changes reflected in this Amendment is (1) the re-valuation of the derivative liability 2) adjustment to the carrying value of the Series A Convertible Preferred Stock and 3) reclassification of Series A Convertible Preferred Stock dividends payable and accretion charges to net loss available to common shareholders.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning our expectations, plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information and, in particular, appear under the headings “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The words “could,” “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “goal,” “forecast” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved.

There may be factors not presently known to us or which we currently consider to be immaterial that may cause our actual results to differ materially from the forward-looking statements. Some of the risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements are described in the section entitled “Risk Factors” (Item 1A) and elsewhere in this Annual Report on Form 10-K.

All forward-looking statements and projections attributable to us or persons acting on our behalf apply only as of the date of the particular statement, and are expressly qualified in their entirety by the cautionary statements included in this report and our other filings with the SEC. We undertake no obligation to publicly update or revise forward-looking statements, including any of the projections presented herein, to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

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PART I

Item 1. Business

General

Devcon International Corp. (“Devcon” or “the Company”) was incorporated in Florida in 1951 as Zinke-Smith, Inc. and adopted its present name in October 1971. Our stock has been publicly traded on the Nasdaq Global Market System since March 1972. Today, Devcon is a holding company that has three operating divisions: electronic security services, materials and construction.

Until 2004, our construction and materials divisions were our primary operations. Between 2002 and 2004, however, our management engaged in a review of strategic alternatives to enter into new lines of business that had a prospect of providing predictable, recurring revenue. In April 2005, we began a process of reviewing in detail the operations of our materials and construction divisions, which were incurring operating losses. This strategic review and shift in operational focus resulted in a series of acquisitions and divestitures which together allowed us to pursue our objective of becoming a large regional provider of electronic security services. The acquisitions and divestitures were as follows:

Acquisitions:

• On July 30, 2004, we acquired the issued and outstanding capital stock of Security Equipment Company, Inc., or SEC.

• On February 28, 2005, we acquired certain assets and assumed certain liabilities of Starpoint Limited from Adelphia Communications.

• On November 10, 2005, we acquired the issued and outstanding capital stock of Coastal Security Company.

• On March 6, 2006, we acquired the issued and outstanding capital stock of Guardian International, Inc.

Dispositions:

• On September 30, 2005, we sold our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business.

• On March 2, 2006, we sold all of the issued and outstanding common shares of Antigua Masonry Products, Ltd., or AMP.

• On May 2, 2006, we sold the fixed assets and substantially all of the inventory of our joint venture assets of Puerto Rico Crushing Company, or PRCC.

• On June 27, 2006, we sold our Boca Raton-based third-party monitoring operations.

• On March 21, 2007, we sold the majority of our construction assets, construction inventory and customer lists of the construction division.

The sale of the construction division assets substantially completed the transformation of Devcon into being primarily an electronic security services company, which transition had been ongoing for over a year.

Electronic Security Services

We are a leading regional provider of electronic security alarm monitoring services, including monitoring of burglary, fire, medical, environmental, video and CCTV, and security access systems to residential, both single and multi-family homes, financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and healthcare and educational facilities. We also have wholesale customers, where we monitor security systems on behalf of independent security companies. We believe the electronic security systems monitoring industry presents an attractive opportunity for predictable recurring revenues.

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Our electronic security services division operates primarily in the state of Florida and in the New York City metropolitan area. We provide monitoring services to retail, commercial and wholesale customers (where we monitor a third-party security company’s customers). Many commercial customers have multiple accounts with us. We provide monitoring services to our customers from two monitoring facilities:

Location	Approximate number of accounts monitored	Primary Customer Types
Hollywood, FL	138,000	Residential, Commercial and Wholesale
New York, NY	4,000	Commercial & Residential

The electronic security services industry is highly competitive and fragmented and consists of local, regional and national providers. Our business strategy is based on building a leading regional presence. Specifically, we believe that the most effective way to build brand recognition, maximize market share, and boost operating efficiencies is to become a market leader in targeted regions that have favorable long-term demographic trends. We believe that developing a familiar, community-oriented brand is more effective than developing a national brand and will allow us to reach a top market share position in the areas in which we choose to operate.

We seek to develop a leading regional presence in growth markets in regions that have favorable demographic and population growth trends, as well as customer density opportunities that can be leveraged. Our first target region is in the Southeast, with a primary focus on the state of Florida. With our acquisitions of SEC, Starpoint, Coastal and Guardian, we have achieved significant customer density in the state of Florida.

Our revenue from electronic security services in 2006 was primarily generated from recurring monitoring and services revenue. The other sources of revenue include non-recurring service revenue and installation revenue.

	(Dollars in thousands)
Type of Revenue	1 Month Ending December 31, 2006		%		11 Months Ending November 30, 2006		%		12 Months Ending December 31, 2006		%
Recurring monitoring and service revenue	$	3,551	72	%	$	38,182	78	%	$	41,733	77	%
Non-recurring service revenue		280	6	%	$	3,068	6	%		3,348	6	%
Installation revenue		1,105	22	%	$	7,801	16	%		8,906	16	%
	$	4,936	100	%	$	49,051	100	%	$	53,987	100	%

As part of our commitment to provide high quality service to our customers, our electronic security services division maintains a trained installation and service force. These employees are trained to install and service the various types of commercial and residential security systems marketed by us.

Security alarm systems include many different types of devices installed at a customer’s premises, which are designed to detect or react to various occurrences or conditions, such as intrusion, movement, fire, smoke, flooding, environmental conditions (including temperature or humidity variations), industrial operations (such as water, gas or steam pressure and process flow controls) and other hazards. In most systems, these detection devices are connected to a microprocessor-based control panel which communicates through telephone lines or wireless devices to a monitoring center where alarm and supervisory signals are received and recorded. Systems may also incorporate an emergency “panic button” which, when pushed, causes the control panel to transmit an alarm signal that takes priority over other alarm signals. In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was activated and transmit the information to one of our central monitoring stations. Commercial applications may also include access control systems and closed circuit television, tailored to the customers’ specific needs. In addition, we provide wireless alarm systems where desired by our customers.

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We do not manufacture any of the components used in our electronic security services businesses. Due to the general availability of the components used in our electronic security services business, we are able to obtain the components of our systems from a number of different sources and to supply our customers with the latest technology generally available in the industry. We are not dependent on any single source for our supplies and components and have not experienced any material shortages of components.

Our new retail customers are generated through our internal sales force. We have eleven sales and customer service branches which handle installations and service. In addition, the Company has two specialized units:

1) New Construction – The Company has two offices in Florida with dedicated representatives who market our services primarily to developers. Through this group, the Company obtains residential subscribers by working directly with home builders. The company markets and installs residential security systems, as well as a variety of other options, such as structured wiring for telephone, intercom systems and computer systems, into homes during their construction.

2) Community Associations – This specialized subset of the residential group also markets our services to Home Owners Associations and Gated Communities, delivering high-quality customer care and service required by these premier communities that are prevalent in the Florida market. This group provides a full-range of services to meet the needs of planned communities and community-owned facilities, including U.L. monitoring, maintenance of existing systems, Video and CCTV, all levels of access control, and burglary and fire systems. Agreements range from five to 20 years in length and can represent service for hundreds to thousands of residences in each community.

Our relationship with our customers begins with an initial consultation to determine the potential customers’ needs and is followed by an equipment and service proposal. Our customers then sign contracts with us that allow us to provide ongoing electronic security system monitoring and maintenance services after the installation of an electronic security system. Most of the monitoring and service we provide is covered by multi-year contracts with RMR. The length of our contracts ranges from three to twenty years, depending on the type of customer and how the contract was acquired and in certain markets provides for automatic renewals for a fixed period (typically one year) unless we or the customer elect to cancel the contract at the end of its term. Customers may also purchase an extended service protection plan, which covers the costs of normal repairs of the security system and which is billed along with the monitoring charges. Based upon the average lengths of customer relationships represented by accounts acquired by us during the last two years, we believe the average length of our customer relationships is approximately ten years.

Our two monitoring facilities operate 24 hours per day, 365 days per year. Each monitoring facility incorporates the use of communications and computer systems that route incoming alarm signals and telephone calls to operators. Each operator within a monitoring facility monitors a computer screen that displays information concerning the nature of the alarm signal, the customer whose alarm has been activated and the premises at which the alarm is located. Other non-emergency signals are generated by low battery status, arming and disarming of the alarm monitoring system by authorized users and test signals and these signals are processed automatically by the computer. Depending upon the type of service for which the customer has contracted, monitoring facility personnel respond to alarms by relaying information to local fire or police departments or other emergency providers, notifying the customer or taking other appropriate action.

Both of our central monitoring facilities hold Underwriter’s Laboratories, Inc., or UL, listings. UL specifications for monitoring centers cover building integrity, back up computer and power systems, staffing and standard operating procedures. In many jurisdictions, applicable law requires that security alarms for certain buildings be monitored by UL- listed facilities. In addition, a UL listing is required by certain commercial customers’ insurance companies as a condition to insurance coverage. In addition, our Hollywood, Florida location holds the Factory Mutual, or FM rating, the industry standard for fire alarm monitoring.

In addition to our retail monitoring (i.e., residential, including community associations, and commercial) our wholesale business serves independent alarm monitoring companies. Typically, we act as the sole provider of monitoring services to independent monitoring companies.

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Branch customer service personnel, during business hours, answer non-emergency telephone calls regarding service, billing, payment and alarm activation issues. Outside normal business hours, customers are directed to a central monitoring station that operates 24 hours per day, allowing a customer to always speak with one of our representatives. In addition, overflow calls at the branches are automatically re-routed to a central monitoring station in order to provide immediate assistance to customers.

Customer attrition has a direct impact on our results of operations, since it affects our revenue, amortization expense, borrowing capacity and cash flow. We define attrition as a ratio which measures the value of lost customer RMR as the numerator divided by the total value of RMR averaged over time to represent an annualized attrition rate. Attrition occurs in our business due to many reasons, including, but not limited to, the following:

i) customers moving their business or home thereby discontinuing their need for our services;

ii) competitors successfully convincing our customers to change their security service provider due to any number of reasons, including price, service levels or group contract changes, such as Community Association contracts; or

iii) economic reasons of the customer to reduce the customer’s expenses by discontinuing security services altogether.

Construction

On March 21, 2007, we sold the majority of our construction assets, construction inventory and customer lists of the construction division and are currently transitioning our remaining contracts to the buyer either through assignment of the contracts or working with the buyer on a subcontract basis. We do not currently intend to enter into any new construction contracts. Accordingly, the below description is predominantly historical but is provided due to the recent nature of the sale, the reflection of the construction division in our consolidated financial statements and because we are still involved in the transitioning activities described below, which we believe may still impact our results of operations and financial condition. For further information on our transition activities, see “Item 1A-Risk Factors.”

General. Our construction division performed earthmoving, excavating and filling operations, built golf courses, roads, and utility infrastructures, dredged waterways and constructed deep-water piers and marinas, primarily in the Caribbean. We historically provided these development services to both private enterprises and government agencies. The revenue related to the work performed by our construction division has been recognized on a percentage-of-completion basis. The majority of our contracts have generally been completed in less than one year. The work has been bid or negotiated at a fixed price or at a unit price where our fee is based upon the quantity of work performed and is often measured in yards, meters or tons rather than time or a time and materials basis. Changes in the scope of the work that were requested by the customer were included in the contract value when duly authorized and agreed upon. We performed the majority of our work utilizing our internal labor and equipment resources.

Operations. We obtained leads for new projects from customers, engineering firms and architectural firms with whom we have established relationships. First, we decided whether to submit a bid or negotiate to undertake a particular project. We prepared and submitted timely proposals detailing what we believed would best meet the customers’ objectives. We also provided long-term or short-term financing from time-to-time to certain customers to obtain construction contracts. During 2006, we financed $0.9 million for one construction project and, as of the end of 2006, the outstanding balance with respect to this project, totaled $1.1 million, including principal and interest. The President of our construction division reviewed all project proposals and bids. After a customer accepted our proposal, a formal contract was prepared and negotiated between the parties. We assigned one of our project managers to maintain close contact with the customer and their project engineers. Other staff was assigned to supervise personnel and the relocation, purchase, lease and maintenance of equipment. Construction management was responsible for the scheduling and monitoring of our operations.

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Backlog. Our backlog of unfulfilled portions of construction contracts at December 31, 2006 was approximately $7.1 million, involving 14 projects. This compares to $17.0 million, involving 18 projects at December 31, 2005. One contract in the Netherlands Antilles represents 34%, one in Antigua represents 20% and one in the Bahamas represents 17% of the total backlog. Between December 31, 2006 and March 30, 2007, we entered into one new construction contract in the U.S. Virgin Islands valued at $2.1 million.

Bonding. We were required by our customers to obtain bid, payment and performance bonds to bid on certain construction contracts.

Customers. Our primary customers were large private and government agencies located throughout the Caribbean. During 2006, we provided services to 23 customers which generated contract revenue of $35.2 million in the year. Three customers represented a concentration of more than 10% of construction revenue. Those three customers represented 12.4%, 11.1%, 10.9% individually or 34.4% of total construction division revenue in 2006.

Equipment. Our businesses required us to lease or purchase and maintain equipment. As of December 31, 2006, our equipment included cranes, bulldozers, road graders, rollers, backhoes, earthmovers, hydraulic dredges and barges. At certain times, some of this equipment was idle between construction jobs until suitable construction contracts were found.

Materials

General. Our materials division produces and distributes ready-mix concrete, crushed stone, sand, and distributes bagged cement on the Caribbean island of Sint Maarten and St. Martin. On September 30, 2005, we sold our materials operations on the islands of St. Thomas and St. Croix, on March 2, 2006, we sold our Antigua operations, and on May 2, 2006 we sold the operating assets of our Puerto Rico joint venture. See “Divestiture of U.S. Virgin Islands, Antigua and Puerto Rico Operations” below.

As of December 31, 2006, the only operation at the St. Martin facility was production of ready mix concrete. In March 2007, access to the St. Martin facility was blocked by the landlord due to a legal dispute and the facility is currently not operational, pending legal access remedies (see Item 3. Legal Proceedings-Petit).

The description below of our materials division, as of December 31, 2006, gives effect to the divestiture of our operations in the U.S. Virgin Islands, Antigua and Puerto Rico. In addition, our historical results of operations for the years ended December 31, 2006, 2005 and 2004 have been revised to exclude the results of operations of the U.S. Virgin Islands, Antigua and Puerto Rico so as to provide comparability of results.

In 2006, we manufactured and distributed ready-mix concrete and crushed aggregate. We also distributed imported aggregate, concrete blocks and bagged cement. Our sales can be segregated into the following groups. Each years’ sales have been adjusted to exclude the sales of the materials operations described above:

	(dollars in thousands) December 31,
	2006		2005		2004
Revenue (net of intersegment sales):
Ready-mix concrete	$	12,561	$	8,186	$	7,822
Aggregates and cement		1,690		3,782		5,094
Concrete block		1,462		1,032		1,335
Other		102		232		1,105
	$	15,815	$	13,232	$	15,356

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Ready-Mix Concrete. Our concrete batch plants mix cement, sand, crushed stone, water and chemical additives to produce ready-mix concrete for use in local construction. Concrete mixer trucks owned and operated by various third parties deliver the concrete to the customer’s job site. We believe our ready-mix operations are the largest on the Caribbean island on which we trade. We purchase the bulk and jumbo bags of cement for use in our ready mix operation.

Quarry Operations, Crushed Stone and Aggregate Production. We own portions of and lease portions of a quarry site in St. Martin at which we extract rock from exposed mineral formations. This rock is sold as boulders or crushed to sizes ranging from 3 ¹/2 -inch stones down to manufactured sand. The resulting aggregate is then sorted, cleaned and stored. The aggregate is sold to customers and used in our operations to make concrete products. Our quarry is the only quarry on the island of Sint. Maarten and St. Martin. As of December 31, 2006, we were not producing aggregate due to a dispute with our landlord. See Item 3. Legal Proceedings-Petit.

Bagged Cement. We purchase bagged cement for resale.

Supplies. We normally obtain all of the crushed rock and some of the sand necessary for our production of ready-mix concrete from our own quarry. We currently are importing all of our crushed rock from St Croix and sand from other Caribbean islands. We purchase bulk cement from the cement terminal located on Sint Maarten. All of our concrete blocks are imported from the Dominican Republic.

Leasing of Concrete Trucks and Other Equipment. In St. Martin and Sint Maarten, substantially all of our concrete trucks and concrete pump trucks have been sold or are leased to former employees that are now in the concrete delivery and pumping business. We have outsourced some of the loading and movement of rock material. Also, we have in some instances sold or leased equipment to former employees or third parties for them to perform work for us. The overall effect of these decisions has been a reduction of fixed costs, resulting in a larger percentage of costs being variable with revenue.

Customers. Our primary customers are building contractors, government agencies, asphalt pavers and individual homeowners. Customers generally pick up quarry products, concrete block and bagged cement at our facilities, and we generally deliver ready-mix concrete to the customers’ job sites. Only one customer was responsible for more than 10% of materials revenue for the period ending December 31, 2006, representing 28.4% of total revenues.

Competition. We have competitors in the materials business in the locations at which we conduct business. The competition includes local ready-mix concrete, and importers of aggregates and concrete blocks. We also encounter competition from the producers of asphalt, which is an alternative material to concrete for road construction. Most competitors have a disadvantage to us with respect to our material costs, but have an advantage over us with respect to lower overhead costs.

Business Development. We obtain our leads and proposed project information from architects, engineers, customers, local Departments of Transportation and local Ministries of Works with whom we have established relationships.

Equipment. Our businesses require us to lease or purchase and maintain equipment. As of December 31, 2006, our equipment included excavators, bulldozers, backhoes, rock crushers, concrete batch plants, concrete mixer and pump trucks and other items.

Divestiture of U.S. Virgin Islands, Antigua and Puerto Rico Operations. As a part of our revised strategic focus on businesses with more predictable recurring revenue, on September 30, 2005, we and our wholly-owned subsidiary, V.I. Cement & Building Products, Inc., or VICBP, a Delaware corporation, sold certain assets constituting our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business to Heavy Materials, LLC, a U.S. Virgin Islands limited liability company. The purchase price for this sale was $10.7 million in cash plus an additional amount equal to the net realizable value of

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accounts receivable and certain assets associated with these operations as of the closing date, September 30, 2005. The net realizable value was paid by the purchaser on the closing date by issuance of a promissory note to us in an aggregate principal amount of $2.6 million with a term of three years bearing interest at 5% per annum with interest only being paid quarterly in arrears during the first twelve months and principal and accrued interest being paid quarterly (principal being paid in eight equal quarterly installments) for the remainder of the term of the note until the maturity date. The sold U.S. Virgin Islands operations represented 41.0% of our materials division’s revenue as of the time of sale.

In addition, on March 2, 2006, we entered into a Stock Purchase Agreement with A. Hadeed or his nominee and Gary O’Rourke, under which we completed the sale of all of the issued and outstanding common shares of AMP, a subsidiary of ours, the business of which constituted all of our materials operations in Antigua. In connection with this sale, the purchasers acknowledged that preferred shares of AMP with a face value equal to European Currency EC $1,436,485 (U.S. $532,032 as of the date of the sale) were outstanding and owned beneficially and of record by certain third-parties and that these preferred shares were reflected as debt on AMP’s books and records. The purchasers further acknowledged that their acquisition of AMP was subject to the preferred shares and that the purchasers had sole responsibility of satisfying and discharging all obligations represented by these preferred shares. Under the terms of this Stock Purchase Agreement, the purchasers acquired 493,051 common shares of AMP for a purchase price equal to $5.1 million, subject to certain adjustments. This purchase price was paid entirely in cash. In addition, the transaction included transfers of certain assets from the Antigua operations to us, as well as pre-closing transfers to AMP of certain preferred shares in AMP that were owned by us. The purchasers have agreed to pay all taxes incurred as a result of the sale.

On May 2, 2006, the Company sold its fixed assets and substantially all of the inventory of PRCC in a sale agreement with Mr. Jose Criado, through a company controlled by Mr. Criado. As part of the sale, Mr. Criado assumed substantially all employee-related severance costs and liabilities arising from the lease agreement (including reclamation and leveling) for the quarry land for a purchase price of $700,000 in cash and a two-year 5% note in an amount equal to the value of inventory as of the closing date, which was $27,955.

Investments, Joint Ventures and Other Assets

We have invested or participated in several joint ventures in connection with our construction and materials divisions.

DevconMatrix Utility Resources, LLC (“DevMat”). In June 2003, we formed a joint venture in the water desalination and sewage treatment industry. We own 80% of the joint venture. Matrix Desalination, Inc. owns the remaining 20%. Our customer base consists of resorts, industrial plants and residential communities. In 2006, DevMat leased and operated both water desalination and waste water treatment plants situated on various islands of the Bahamas. We had $0.6 million in revenue and incurred $0.3 million of operating expenses for the year ended December 31, 2006.

Construction Technologies Limited. During 2004 and 2005, we made advances of $1.9 million and $0.5 million, respectively, to Construction Technologies Limited, or CTC, a limited liability company incorporated in St. Christopher and Nevis, or St. Kitts. The advances were made pursuant to a project funding agreement. Under the project funding agreement, we agreed to advance $2.3 million to fund CTC’s cash requirements in fulfilling its obligation to construct approximately 6.5 miles of road for the National Housing Corporation, a statutory agency of the government of St. Kitts. The advances are being repaid from the proceeds of an EC $10.0 million (U.S. $3.7 million) promissory note, which was issued to CTC by the NHC as consideration for the project. We have possession of the NHC Note, which has been guaranteed by the government of St. Kitts. The NHC has been instructed by CTC to make payments due under the NHC Note to us. The principal of the NHC Note is repayable in fourteen equal semi-annual installments, beginning on April 30, 2005, and bears interest at 7%. Pursuant to the terms of the funding agreement, we are entitled to retain 81.66% of payments made under the NHC Note. We received installments totaling $0.8 million and $0.7 million in 2005 and 2006, respectively. We retained, pursuant to the funding agreement, $0.6 million and $0.6 million from these receipts in 2005 and 2006, respectively. The retained funds were applied to reduce the $2.3 million balance of original advances to $1.7 million and $1.1 million, as of December 31, 2005 and 2006, respectively. Additionally, we have trade receivables from and made other secured loans to CTC in conjunction with other transactions entered into in the ordinary course of business. CTC is a leading producer of concrete in St. Kitts.

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West Highland Development Company, Inc., Puerto Rico. During the period 1998 through 2006, we invested a total of $199,000 for a 33.3% interest in a real estate joint venture in Puerto Rico that owns approximately 100 acres of land in Aguadilla, Puerto Rico. In January 2004, the local government advised us that it intended to expropriate approximately 2 acres of the real estate in Aguadilla. The joint venture responded to the expropriation proceeding by filing a complaint in February 2004. In the fourth quarter of 2004, the joint venture received the uncontested expropriation proceeds totaling $385,070 and paid off its bank loan, which had been guaranteed by us. In 2007, the legal representative for the agency, with which the joint venture filed a complaint, resubmitted a mutually acceptable settlement proposal with a favorable recommendation. The settlement proposal would result in an additional $182,580 being received by the joint venture.

Belvedere. In February 2003, we entered into a development agreement with the Island Territory of Sint Maarten to market and develop 197 single-family homes in the Belvedere subdivision of the Island Territory. Through December 31, 2006, ten houses had been sold. The Development Agreement contemplated completion of the Belvedere Project by February 2007. Due to delays in the Island Territory establishing a Mortgage Guarantee Fund and other limiting factors, in April 2006, we and a Commissioner for the Island Territory mutually agreed to terminate the Development Agreement. Under a separate agreement with Pream Consultants N.V., we subcontracted substantially all of our obligations, other than the funding obligation, under the Development Agreement. In November 2005, we terminated the Pream Agreement for reasons provided for in the agreement. Our investment in the Belvedere Project was $478,102 and $550,285 as of December 31, 2006 and December 31, 2005, respectively. During 2006, we recorded an impairment charge of $111,710 with respect to the three remaining unsold partially-built houses. The impairment charge was based upon an independent appraisal of the houses. As of December 31, 2006 and 2005 these assets were classified as assets held for sale.

Financing

On November 9, 2005, we signed an Agreement and Plan of Merger with Devcon Acquisition, Inc., an indirect wholly-owned subsidiary of ours, and Guardian in which we agreed to acquire all of the outstanding capital stock of Guardian, in turn, owned 100% of Mutual Central Alarms Services, Inc., and Stat-land Burglar Alarm System and Devices, Inc. On March 6, 2006, we completed the acquisition of Guardian under the terms of the Agreement and Plan of Merger. The aggregate cash purchase price was approximately $65.5 million, excluding transaction costs of $1.7 million. This purchase price consisted of (i) approximately $24.6 million paid to the holders of the common stock of Guardian, (ii) approximately $23.3 million paid to redeem two series of Guardian’s preferred stock, (iii) approximately $13.3 million used to assume and pay specified Guardian debt obligations and expenses and (iv) approximately $1.0 million used to satisfy specified expenses incurred by Guardian in connection with the merger. The balance of the purchase consideration, approximately $3.3 million, was placed in escrow. Subject to reconciliation based upon RMR, net working capital levels as of closing and subject to other possible adjustments, Guardian common shareholders received a partial pro-rata distribution from escrow in July 2006, with the balance pending resolution of certain specific income tax matters.

To finance the Guardian acquisition, we issued to accredited institutional investors under the terms of a Securities Purchase Agreement, or SPA, dated as of February 10, 2006, an aggregate principal amount of $45 million of notes along with warrants to acquire an aggregate of 1,650,943 shares of our common stock at an exercise price of $11.925 per share. The warrants expire on the third anniversary of their March 6, 2006, issuance date and are valued using a discounted cash flow model, which takes into account the exercise price, volatility of our stock and our stock price at issuance. The notes bore interest at a rate equal to 8% per annum (which rate would have increased to 18% per annum in the event we failed to make payments required under the notes when due). We also increased the amount of cash available under our revolving credit facility with CapitalSource Finance, LLC, or CapitalSource Revolving Credit Facility, from $70 million to $100 million and used $35.6 million under this facility to finance the remaining purchase consideration of the Guardian acquisition, repay an $8 million CapitalSource Bridge Loan and to increase working capital. For further information on our indebtedness, see “Item 1A – Risk Factors”.

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On October 20, 2006, under the terms of the SPA, these investors received, in exchange for the notes, an aggregate of 45,000 shares of our Series A Convertible Preferred Stock, par value $.10 per share, with a liquidation preference equal to $1,000 convertible into common stock at a conversion price equal to $9.54 per share. The conversion price of the Series A Convertible Preferred Stock and the exercise price of the warrants issued with the notes are subject to customary anti-dilution adjustments. The issuance of the Series A Convertible Preferred Stock and of the warrants could have caused the issuance of greater than 20% of our outstanding shares of common stock upon the conversion of the Series A Convertible Preferred Stock and the exercise of the warrants. Our Board approved the creation of a new class of preferred stock and the creation of the Series A Convertible Preferred Stock, as well as the issuance of the Series A Convertible Preferred Stock and the warrants. The creation of a new class of preferred stock was subject to shareholder approval under Florida law, while, for various reasons related to the potential issuance of greater than 20% of our outstanding shares of common stock, the issuance of the Series A Convertible Preferred Stock required shareholder approval under the rules of Nasdaq. On February 10, 2006, holders of more than 50% of our Common Stock approved the amendment to our articles of incorporation creating a new class of preferred stock and the issuance of the Series A Convertible Preferred Stock.

In connection with the issuance of these securities, we entered into a Registration Rights Agreement, under the terms of which we agreed to use our best efforts to cause a registration statement to be declared effective by the Securities and Exchange Commission no later than January 25, 2007. This registration statement would register the resale of the shares of our common stock issuable upon conversion of the Series A Convertible Preferred Stock, exercise of the warrants and in payment of the dividend obligations under the Certificate of Designations governing the Series A Convertible Preferred Stock. The Registration Rights Agreement provides that, to the extent we fail to cause this registration statement to be declared effective by the Securities and Exchange Commission by the effectiveness deadline, we must pay registration delay payments in the amount of one percent (1.0%) of the aggregate purchase price paid by the investors for the Series A Convertible Preferred Stock, or $450,000, for every 30 days (pro rated for periods totaling less than thirty days) this effectiveness failure remains.

On October 23, 2006, we filed a registration statement to register the resale of these shares. The Securities and Exchange Commission reviewed this registration statement and, as a consequence of recent clarifications by the Staff of Rule 415 under the Securities Act of 1933, as amended, we have encountered difficulties determining when all of these shares may be registered and sold by the investors. These clarifying interpretations were issued by the Staff after we and the Investors had entered into the Registration Rights Agreement and issued the shares of Series A Convertible Preferred Stock. Accordingly, we have been unable to cause this registration statement to be declared effective by the Securities and Exchange Commission.

Under the terms of the Registration Rights Agreement, these registration delay payments accrue from January 26, 2007 until the earlier of us successfully obtaining a waiver or amendment of these registration delay payments or the registration statement being declared effective. The registration delay payments are not payable until every thirtieth day after the effectiveness failure. Accordingly, the first registration delay payment was due on February 26, 2007. In addition, under the Certificate of Designations governing the Series A Convertible Preferred Stock, (a) the failure of the applicable Registration Statement to be declared effective by the Securities and Exchange Commission on the date that is sixty (60) days after the applicable effectiveness deadline or (b) our failure to pay to the investors any amounts when and as due under the Certificate of Designations or any other transaction document contemplated in the

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Certificate of Designations is defined as a “Triggering Event” allowing the Required Holders, as defined below, to require us to redeem all shares of their Series A Convertible Preferred Stock by the fifth business day after transmitting notice to us of their desired redemption. Under the terms of the Certificate of Designation, this redemption would be effected by us being required to pay in cash an amount equal to 115.0% of the face value of all or a portion, as applicable, of the outstanding shares of the Series A Convertible Preferred Stock, plus all accrued but unpaid interest and dividends. To the extent our stock price at the time of this redemption request multiplied by the number of shares into which the Series A Convertible Preferred Stock is convertible exceeds this cash payment amount, the redemption would be effected by payment of this higher amount increased by the same 15.0% premium, plus all accrued but unpaid interest and dividends.

Based upon general statements made by certain officials within the Securities and Exchange Commission to the private equity marketplace with respect to its recent clarification of Rule 415, we believe an amendment of the terms of the Series A Convertible Preferred Stock and possibly the warrants would be necessary in order to permit us to cause a Registration Statement covering some portion of these shares to be declared effective by the Securities and Exchange Commission. As indicated below, we have been holding discussions with the investors as to the form these amendments will take but have not yet reached a final agreement with the investors as to these terms. Approval by the “Required Holders”, defined as those investors holding, in the aggregate, a majority of the Series A Convertible Preferred Stock, is all that is required for these amendments to take effect. We cannot assure you that we and the investors will be able to agree to and enter into the necessary amendments. In addition, to date the Securities and Exchange Commission has provided very little to no public guidance regarding its recent clarifications of Rule 415. Accordingly, we cannot predict the Securities and Exchange Commission’s final position with respect to Rule 415.

In furtherance of these negotiations, on April 2, 2007, effective as of March 30, 2007, we entered into Forbearance and Amendment Agreements (the “Forbearance Agreements) with investors constituting the “Required Holders”, i.e. investors holding, in the aggregate, a majority of the Company’s previously-issued Series A Convertible Preferred Stock. Under the terms of these Forbearance Agreements, the Required Holders agreed that for a period of time ending no later than January 2, 2008, they shall each refrain from taking any remedial action with respect to the Company’s failure (the “Effectiveness Failure”) to have declared effective by the United States Securities and Exchange Commission a registration statement registering the resale of the shares of our common stock underlying the Series A Convertible Preferred Stock and warrants as required by a Registration Rights Agreement, dated February 20, 2005, by and between the Company, the Required Holders and the remaining holder of the Series A Preferred Shares (the “Registration Rights Agreement”). The parties also agreed to refrain from declaring the occurrence of any “Triggering Event” with respect to the Effectiveness Failure and from delivering any Notice of Redemption at Option of Holder with respect thereto or demanding any amounts due and payable with respect to the Effectiveness Failure, including without limitation, any Registration Delay Payments. No remedial actions were taken by the Required Holders.

Pursuant to the terms of these Forbearance Agreements, we agreed to submit to our shareholders for approval at our annual shareholder meeting a form of Amended and Restated Certificate of Designations (the “Amended Certificate of Designations”) setting forth certain revised terms of the Series A Convertible Preferred Stock as described in the Forbearance Agreements. On June 29, 2007, our shareholders approved the Amended Certificate of Designations at the annual shareholder meeting. We filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date.

In connection with the filing of the Amended Certificate of Designations, the Company and the parties to the Forbearance Agreements entered into an Amended and Restated Securities Purchase Agreement, dated as of July 13, 2007 (the “Amended Securities Purchase Agreement”), and an Amended and Restated Registration Rights Agreement, dated as of July 13, 2007 (the “Amended Registration Rights Agreement”).

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The Amended Securities Purchase Agreement contains terms similar to the original Securities Purchase Agreement entered into among the parties on February 10, 2006 except that one holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of our common stock, par value $.10 (the “Common Stock”). The Amended Certificate of Designations also included a reduction in the conversion price of the Series A Convertible Preferred Stock to $6.75, allowance for the accrual of dividends on the Series A Convertible Preferred Stock at a rate equal to 10% per annum, which dividends may be payable in kind, and a revision of the definition of the Leverage Ratio. The revised definition shall provide for the Leverage Ratio to be calculated as a multiple of recurring monthly revenue (“Performing RMR”) as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant to require the Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30, 2008. In addition, each of the parties to the Amended Securities Purchase Agreement waived certain rights to receive Registration Delay Payments and certain other provisions set forth in the governing documents. In addition, the parties executed an Amended and Restated Registration Rights Agreement which removed the obligation to have declared effective by the United States Securities and Exchange Commission by January 2, 2008 a registration statement registering the resale of our shares of common stock underlying the Series A Convertible Preferred Stock and warrants as required by the Registration Rights Agreement, dated February 20, 2005.

With respect to the other holder of the Series A Convertible Preferred Stock, which did not enter into the Forbearance Agreements but had filed a lawsuit against the Company, on August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement Agreement”) pursuant to which the Company resolved all claims against the Company set forth in the lawsuit such holder filed. Pursuant to the Settlement Agreement, the Company paid to such holder an amount equal to $7.1 million and all accrued interest since January 1, 2007 (the “Settlement Amount”) and the holder returned all shares of the Company’s Series A Convertible Preferred Stock held by the holder to the Company. In return, all parties to the lawsuit entered into mutual releases releasing each other from any and all claims.

No unregistered securities were sold or issued in 2006, 2005 or 2004. In January 2007, 144,162 unregistered shares were issued as a partial payment of dividends related to our outstanding shares of Series A Convertible Preferred Stock.

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Financial Information about Segments

The following table sets forth financial highlights of our electronic security services, construction and materials division for the years ended December 31, 2006, 2005 and 2004. Total assets by segment and other information are further described in Note 18, Segment Reporting.

	(dollars in thousands) Year Ended December 31,
	2006			2005			2004
Revenue (net of “intersegment” sales), continuing operations
Electronic security services	$	53,987		$	18,515		$	943
Construction		35,189			39,334			25,052
Materials		15,815			13,232			15,356
Other		632			701			183
	$	105,623		$	71,782		$	41,534
Operating (loss) income by segment, continuing operations
Electronic security services	$	(7,349	)	$	(771	)	$	(108	)
Construction		(7,644	)		(2,916	)		4,593
Materials		(520	)		(5,613	)		(2,987	)
Other		(332	)		(111	)		(56	)
Unallocated corporate overhead		(7,314	)		(5,545	)		(4,421	)
	$	(23,159	)	$	(14,956	)	$	(2,979	)

Financial Information about Geographic Areas

The following table sets forth our revenue by geographic area. Revenue by geographic area includes sales to unaffiliated customers based on customer location, not the selling entity’s location. We move our equipment from country to country; therefore, to make this disclosure meaningful, the geographic delineation of assets is based upon the location of the legal entity owning the assets.

	(dollars in thousands) Year-Ended December 31,
	2006		2005		2004
Revenue by geographic areas:
U.S. and its territories	$	65,068	$	22,073	$	4,985
Netherlands Antilles		14,238		12,938		9,967
Antigua and Barbuda		3,767		2,983		1,863
French West Indies		4,985		6,853		6,131
Bahamas		17,565		26,917		16,866
Other foreign areas		—		18		1,722
Total foreign countries		40,555		49,709		36,549
Total (including U.S.)	$	105,623	$	71,782	$	41,534
Long-lived assets, net, by geographic areas:
U.S. and its territories	$	4,834	$	6,840	$	10,948
Netherlands Antilles		657		297		1,199
Antigua and Barbuda		2,365		8,794		8,314
French West Indies		653		391		1,635
Bahamas		2,773		5,414		5,649
Total foreign countries		6,448		14,896		16,797
Total (including U.S.)	$	11,282	$	21,736	$	27,745

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Tax Exemptions and Benefits

Some of our offshore earnings are not taxed or are taxed at rates lower than U.S. statutory Federal income tax rates due to tax exemptions and tax incentives.

The U.S. Virgin Islands Economic Development Commission granted us tax exemptions on most of our U.S. Virgin Islands earnings through March 2003. We have applied for an extension of this tax exemption; however, there is no guarantee that it will be granted. The EDC completed a compliance review on our subsidiary in the U.S. Virgin Islands on February 6, 2004. The compliance review covered the period from April 1998 through March 31, 2003 and resulted from our application to request an extension of tax exemptions from the EDC. The EDC’s compliance report cited our failure to make gross receipts tax payments of $505,000 and income tax payments of $2.2 million, excluding interest and penalties. This was the first time that a position contrary to ours or any position on this specific issue had been raised by the EDC. In light of these events, and based on discussions with legal counsel, we established a tax accrual at December 31, 2003 for such exposure which approximated the amounts set forth in the EDC review report. In September 2005 and 2004, the statute of limitations with respect to the income tax return filed by us for the years ended December 31, 2001 and 2000, respectively, expired. Accordingly, in the third quarter of 2005 and 2004, we reversed $37,440 and $2.3 million, respectively, of the tax accrual established at December 31, 2003. We have not had recent communication with the EDC regarding this matter and if challenged by the U.S. Virgin Islands taxing authority would vigorously contest its position. These tax accrual matters have been included in the results of discontinued operations.

For periods after December 31, 2003, we have accrued, but on the advice of Virgin Islands counsel, not remitted, gross receipts taxes, which would be due should our application for an extension of benefit be withdrawn or denied. Following the sale of the U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and concrete materials business in September 2005, we did not generate any additional revenue which is covered under the applications for extension benefits. Accordingly, the accrual for this gross receipts tax exposure at December 31, 2006 was $2.0 million and will remain unchanged in the future pending resolution of the application for extensions. In addition, at December 31, 2006, we had accrued $0.5 million in accrued interest relating to this obligation.

U.S. tax laws provide that certain of our offshore earnings are not taxable for U.S. federal income tax purposes, and most post-April 1988 earnings from our materials business in the U.S. Virgin Islands can be distributed to us free of U.S. income tax. Any distribution to Devcon International Corp, the parent company, of: (1) earnings from our U.S. Virgin Islands operations accumulated prior to April 1, 1988; or (2) earnings from our other non-U.S. incorporated operations, would subject us to U.S. federal income tax on the amounts distributed, less applicable taxes paid in those jurisdictions according to specific rules concerning foreign tax credits. In December 2004, we distributed $4.7 million of the earnings from one of our subsidiaries in Antigua. The distribution was made under the benefit of a deemed payment provision of a settlement agreement between the government of Antigua and Barbuda and us. The settlement agreement with the government of Antigua and Barbuda provided for withholding tax credits of $7.5 million for dividend distributions made by us from Antigua through the years 2005 to 2007. At December 31, 2006, 2005 and 2004, $15.4 million, $27.6 million and $44.4 million, respectively, of accumulated earnings had not been distributed to the parent company.

During 2005, we distributed $20.4 million of dividends from Antigua using $5.1 million of the withholding tax credits.

During 2006, we distributed an additional $4.6 million of earnings before the sale of the materials division subsidiaries in Antigua, using another $1.2 million of the withholding tax credits. We intend to use the remaining $1.2 million of withholding tax credit to the extent we distribute dividends from our remaining Antigua operations.

For further information on our tax exemptions and income taxes, see Note 16, Income Taxes.

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Intellectual Property

We possess trade names used in our Caribbean operations, of which none are registered. We believe that trade names, which are normally derivatives of the corporate names of our local subsidiaries, have name recognition and are valuable to us. However, for our construction and materials divisions, our trade names have no book value on our consolidated balance sheet.

Devcon International Corp. owns a State of Florida service mark registration and a federal service mark registration for the DEVCON service mark, and Devcon Security Holdings, Inc. owns a State of Florida service mark registration and a federal service mark registration for the DEVCON SECURITY SERVICES service mark. Each of the registrations covers the use of the applicable mark in connection with installation and maintenance of burglar and security alarm systems and monitoring of burglar and security alarm systems. The DEVCON SECURITY SERVICES and DEVCON federal service mark registrations were both granted in 2006. The Florida registrations were granted in 2005.

Devcon Security Services, Inc., or DSS, owns U.S. federal trademark registrations for the marks CENTRAL ONE^®, as used with installation, maintenance and monitoring of residential, commercial and industrial burglar and security alarm systems. Additionally, DSS owns State of Florida trademark registrations for CENTRAL ONE, FAX BACK AND COMPREHENSIVE DEALER SERVICES. DSS owns U.S. federal trademark registrations for the marks GIBRALTAR SECURITY ALARM SYSTEMS^® and PREPARE AND PROTECT^®, each as used with installation and maintenance of burglar electronic security systems, fire alarms, home and commercial security systems, voice intercom systems and closed circuit television and card access systems, as well as a U.S. federal trademark registration for its SECURITY BY GUARDIAN INTERNATIONAL and G logo^® as used with installation, monitoring and maintenance of voice intercom systems and closed circuit television and card access systems. Additionally, DSS owns State of Florida trademark registrations for its GUARDIAN INTERNATIONAL SECURITY and G logo as well as its G logo, each for use with installation, monitoring and maintenance of burglar electronic security systems, fire alarms, home and commercial security systems, and installation and maintenance of voice intercom systems, as well as a State of Florida trademark registration for PRECISION SECURITY SYSTEMS as used with commercial and residential electronic security system sales, service and monitoring. Currently, there are no pending or threatened litigation or claims relating to our trademarks. Also, to the best of our knowledge, there are no unasserted possible claims or assessments that may call for financial disclosure. We cannot assure you that third parties will not attempt to assert superior trademark rights in similar marks or that we will be able to successfully enforce and protect our rights in the trademarks against third party infringers

Business Address

Our executive offices are located at 595 South Federal Highway, Suite 500, Boca Raton, Florida 33432, our telephone number is (561) 208-7200 and our web address is www.devc.com. In addition, we use www.devcon-security.com as a separate web address in connection with electronic security services division. In this document, the terms “Company”, “we”, “our”, “us” and “Devcon” refer to Devcon International Corp. and its subsidiaries.

Employees

At December 31, 2006, we employed 703 persons. As of that date, we employed 524 persons in our electronic security services division, 18 of whom are members of a union; we employed 117 persons in our construction division, four of whom are members of a union; we employed 49 persons in our materials division, none of whom are members of a union; and we employed 13 persons in corporate administration, none of whom are members of a union. Most employees are employed on a full-time basis. We believe employee relations are satisfactory.

In connection with the sale of our construction division, we entered into a Transition Services Agreement with the buyer under the terms of which, we have agreed to make available specified employees and independent contractors and other non-employees of ours to assist the buyer with the operation of the construction division through September 16, 2007.

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Environmental Matters

We are involved, on a continuing basis, in monitoring our compliance with environmental laws and in making capital and operating improvements necessary to comply with existing and anticipated environmental requirements. While it is impossible to predict with certainty, we currently do not foresee such expenses in the near future as having a material effect on our business, results of operations or financial condition. See Item 3, Legal Proceedings, and Note 21, Commitments and Contingencies.

Subsequent Events

Resignation of Chief Executive Officer. On January 22, 2007, Mr. Stephen J. Ruzika resigned as our Chief Executive Officer. Also on January 22, 2007, our Board of Directors appointed Richard C. Rochon, our Chairman of the Board, to the position of Acting Chief Executive Officer. Mr. Rochon has been our Chairman since January 24, 2006, and a director of ours since 2004. Mr. Rochon is Chairman and Chief Executive Officer of Royal Palm Capital Partners, a private investment and management firm. He is also a Principal of Royal Palm Capital Management, LLLP, an affiliate of Royal Palm Capital Partners.

Resignation of Chief Financial Officer. On February 9, 2007, Mr. George M. Hare resigned as our Chief Financial Officer. On February 13, 2007, our Board of Directors appointed Robert C. Farenhem, a Principal of Royal Palm Capital Management, LLLP, to the position of Chief Financial Officer. Mr. Farenhem has been a Principal and the Chief Financial Officer of Royal Palm Capital Partners since April 2003 and has been a director and officer of Coconut Palm Acquisition Corp., a blank check company, since April 29, 2005. Between April 18, 2005 and December 20, 2005, Mr. Farenhem was our Interim Chief Financial Officer.

Sale of Construction Division. On March 21, 2007, we completed the transactions contemplated by an Asset Purchase Agreement, dated as of March 12, 2007 entered into by us and BitMar Ltd., a Turks and Caicos corporation and successor-in-interest to Tiger Oil, Inc., a Florida corporation, consisting of the sale of fixed assets, inventory and customer lists constituting a majority of the assets of the construction division, for approximately $5.3 million, subject to a holdback of $525,000 to be retained for resolution of indemnification matters in the form of a non-negotiable promissory note bearing a term of 120 days. We retained working capital of $6.7 million, including approximately $2.1 million in notes receivable, as of December 31, 2006. The majority of our leasehold interests were retained by us with the buyer assuming only our shop location at Southwest 10th Street, Deerfield Beach, Florida and entering into a 90-day sublease of the headquarters of the construction division located at 1350 East Newport Center Drive in Deerfield Beach, Florida. In addition, we entered into a three-year noncompetition agreement under the terms of which we agreed not to engage in business competitive with that of the construction division in any country, territory or other area bordering the Caribbean Sea and the Atlantic Ocean, excluding any production and distribution of ready-mix concrete, crushed stone, sand, concrete block, asphalt and bagged cement throughout this territory and also agreed to other standard provisions concerning the non-solicitation of customers and employees of the construction division. In addition, we and the buyer entered into a Transition Services Agreement under the terms of which, we have agreed to make available specified employees and independent contractors and other non-employees of ours to assist the buyer with the operation of the construction division through September 16, 2007.

As a result of this transaction, we recognized a loss from the sale in the fourth quarter of 2006 of approximately $2.8 million, exclusive of any employee severance and other transaction-related expenses which will be recognized in the first quarter of 2007. We have not yet determined the amount of these transaction-related expenses as they are pending resolution of a closing matter.

Donald L. Smith, Jr., our former Chairman and Chief Executive Officer and a current director of the Company and Donald L. Smith, III, a former officer of ours, are principals of the buyer. Other than the Asset Purchase Agreement, Transition Services Agreement and our relationship with Donald L. Smith, Jr. and Donald L. Smith, III, there is no material relationship between us and the buyer of which we are aware.

15

Forbearance and Amendment Agreements. On April 2, 2007, effective as of March 30, 2007, the Company entered into the Forbearance Agreements with the Required Holders holding, in the aggregate, a majority of the Company’s previously-issued Series A Convertible Preferred Stock. See discussion above under Financing, “Item 1-Business-Financing.”

Item 1A. Risk Factors

You should read and consider carefully each of the following factors, as well as the other information contained in, attached to or incorporated by reference in this report. If any of the following risks materialize, our financial condition and results of operations could be materially and adversely affected and the value of our stock could decline. The risks and uncertainties described below are those that we currently believe may materially affect us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business operations.

General Risk Factors Relating to our Business

Our officers and directors have the ability to significantly influence the outcome of any matters submitted to a vote of our shareholders.

Certain of our officers and directors through their affiliation with Coconut Palm Capital Investors I, Inc. have the power to vote, in their sole discretion, all of the securities owned by the former limited partners of Coconut Palm Capital Investors I, Ltd. Determining the current holdings of the former limited partners is a time-consuming task and is performed annually to coincide with the record date for the Annual Shareholders’ Meeting.

As of September 25, 2006 (the record date), the directors and executive officers, as a group, beneficially owned 78.27% of our common stock, assuming beneficial ownership is defined as including common stock ownership after exercising all warrants or options exercisable within 60 days of this date. Therefore, they have the ability to significantly influence the outcome of any matters submitted to a vote of our shareholders. Risks that may result from this ability are largely focused on the following variables:

• the potential for making decisions which are based on a return on investment timetable which is based on the individual preferences and interests of the directors and executive officers which may be different and in conflict with the more immediate horizon which may be expected in public equity markets at any point in time.

• the potential for investing in operating strategies which reflect a higher or lower relationship of risk and returns on investment than other common equity investors of the Company.

Our future success is dependent, in part, on key personnel and failure to retain these key personnel would adversely affect our operation. In addition, inherent uncertainties associated with the acquisition of past or future acquisition candidates may cause the acquisition candidates or us to lose key employees.

We are highly dependent on the skills, experience and services of key personnel. As a result, we have entered into employment agreements with certain members of senior management. The loss of such key personnel could have a material adverse effect on our business, operating results or financial condition. We do not maintain key man life insurance with respect to these key individuals. Our potential growth and expansion are expected to place increased demands on our management skills and resources. Therefore, our success also depends upon our ability to recruit, hire, train and retain additional skilled and experienced management personnel. Employment and retention of qualified personnel is important due to the competitive nature of our industry. Our inability to hire new personnel with the requisite skills could impair our ability to manage and operate our business effectively. On January 22, 2007, Stephen J. Ruzika, our Chief Executive Officer and, on February 9, 2007, George M. Hare, our Chief Financial Officer, resigned from their positions with our company. Mr. Ruzika possessed a significant amount of knowledge regarding the electronic security services industry. The departure of any additional officers with similar knowledge of the industry could have a material adverse effect on our financial condition and results of operations.

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Employees of a past or future acquisition candidate may experience uncertainty about their future roles with the surviving corporation. This uncertainty may adversely affect the surviving corporation’s ability to retain key management, sales and marketing personnel. Many of these employees may be critical to the business and operations of the surviving corporation. The loss of key personnel may imperil the acquisition of any such acquisition candidate or lead to disruptions of our operations. The loss of key personnel also could result in a loss of key information and expertise, which could result in future replacement costs associated with recruitment and training.

We are subject to significant debt, debt service, dividend service and redemption obligations which could have an adverse effect on our results of operations.

Our electronic security services division has a $100 million CapitalSource Revolving Credit Facility and, as of December 31, 2006 and December 31, 2005, we had $89.1 million and $55 million, respectively, of borrowings outstanding. In addition, we have an aggregate of 45,000 shares of Series A Convertible Preferred Stock with an aggregate liquidation preference of $45 million. These shares of Series A Convertible Preferred Stock are subject to regular dividend payment and redemption obligations. On April 2, 2007, we entered into a Forbearance Agreement with respect to the Series A Convertible Preferred Stock with some of the institutional investors, which among other amended terms provides for the ability, at our option, to accrue dividends until the underlying documents are amended, at which time we could at our option pay the dividend in kind. The Forbearance Agreement terminates January 2, 2008. As a result of the foregoing transactions, we are incurring significant interest expense and accruing significant dividend liabilities. The degree to which we are leveraged could have significant consequences, including the following:

• our ability to obtain additional financing in the future for capital expenditures, potential acquisitions, and other purposes may be limited or financing may not be available on terms favorable to us or at all;

• a substantial portion of our cash flows from operations must be used to pay our interest expense and repay our senior debt, dividend and redemption obligations under the terms of the Series A Convertible Preferred Stock, which reduces the funds that would otherwise be available to us for our operations and future business opportunities; and

• fluctuations in market interest rates will affect the cost of our borrowings to the extent not covered by interest rate hedge agreements because our credit facility bears interest at variable rates.

The CapitalSource Revolving Credit Facility contains financial covenants that require our subsidiaries which comprise our electronic security services division to meet a number of financial ratios and tests, and imposes restrictions on our electronic security services division’s ability to, among other things:

• incur more debt including any sale-leaseback or synthetic lease transaction;

• pay dividends, redeem or repurchase stock or make other distributions or impair the ability of any subsidiary to make such payments to the borrower;

• make acquisitions or investments;

• use assets as security in other transactions, or otherwise create liens on our assets

• enter into transactions with affiliates (including extending loans to employees);

• impair the terms of any material contract; and

• guarantee obligations of another.

Failure to comply with the obligations in the CapitalSource Revolving Credit Facility could result in an event of default, which, if not cured or waived, could permit acceleration of this indebtedness or of other indebtedness, allowing our senior lenders to foreclose on our electronic security services assets.

In addition, the Series A Convertible Preferred Stock contain a financial covenant imposing a restriction on our ability to incur additional indebtedness. As a result, so long as any shares of Series A Convertible Preferred Stock remain outstanding, we will not

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be able to allow our indebtedness ratio to exceed a specified maximum leverage amount. Our failure to comply with this indebtedness ratio covenant could result in an event of default, which, if not cured or waived, could permit holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends.

As of December 31, 2006, our current debt service obligation and Series A Convertible Preferred Stock dividend expenses are summarized in the chart below (000’s). The chart takes into account the proposed amendments set forth in the Forbearance Agreements described above, including an increase in the dividend rate of the Series A Convertible Preferred Stock to 10% and the ability to accrue dividends by adding the amounts to the stated value of the Series A Convertible Preferred Stock:

	Principal Value		Approximate 2007 Annual Interest Expense or Dividend1
Debt Service:	(dollars in thousands)
Revolving Credit Facility (LIBOR plus 5.75%)	$	89,120	$	9,837
Other		158		6
Series A Convertible Preferred Stock (10% Dividends)		45,000		4,500
Total Debt Service	$	134,278	$	14,343
	Revolving Credit Facility		Convertible Preferred Stock
Maturity of Debt:
2008	$	89,120
2009		—
2010		—	$	15,000
2011		—		15,000
2012		—		15,000
Total	$	89,120	$	45,000

¹ Dividend calculated using the dividend rate in the Forbearance Amendment Agreements effective as of March 30, 2007.

If we do not successfully implement our business strategy, we may not be able to repay or refinance our senior debt or comply with the terms of the Series A Convertible Preferred Stock.

We may not be able to successfully implement our business strategy or realize our anticipated financial results. Accordingly, our cash flows and capital resources may not be sufficient to pay the interest charges and principal payments on our senior debt or comply with redemption provisions of the Series A Convertible Preferred Stock. Failure to pay our interest expense, make our principal payments, or effect a redemption would result in a default. If this occurs, our substantial indebtedness and the redemption amount for the Series A Convertible Preferred Stock could have important consequences to us and may, among other things:

• limit our ability to obtain additional financing to fund growth, working capital, capital expenditures, debt service and dividend service requirements or other purposes;

• limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal payments and fund debt and dividend service and redemption requirements;

• cause us to be unable to satisfy our obligations under our debt agreements or the terms of the Series A Convertible Preferred Stock;

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• make us more vulnerable to adverse general economic and industry conditions;

• limit our ability to compete with others who are not as highly leveraged as we are;

• limit our flexibility in planning for, or reacting to, changes in our business, industry and market conditions;

• cause us to sell assets; and

• cause us to obtain additional equity capital or refinance or restructure all or a portion of our outstanding senior debt.

In the event that we are unable to do so, we may be left without sufficient liquidity and may not be able to repay our senior debt. In that case, the senior lenders would be able to foreclose on our assets. Even if new financing is available, it may not be on terms that are acceptable to us.

Similarly, if we are not able to successfully implement our business strategy or realize our anticipated financial results, we may not be able to comply with the terms of the Series A Convertible Preferred Stock requiring us to redeem, for cash, all outstanding shares of Series A Convertible Preferred Stock, in equal installments, on the fourth, fifth and sixth anniversary of completion of the private placement. If we fail to effect any required redemption of the Series A Convertible Preferred Stock, the applicable redemption amount per unredeemed share of Series A Convertible Preferred Stock will bear interest at the rate of 1.5% per month until paid in full and the investors will have the option to require us to convert any of those unredeemed shares into shares of our common stock substituting market prices for the conversion price, which market prices may be lower than the conversion price resulting in a larger number of shares of our common stock being issued, resulting in greater dilution to our existing shareholders.

Our stock is thinly traded.

While our stock trades on Nasdaq, our stock is thinly traded and you may have difficulty in reselling your shares quickly. The low trading volume of our common stock is outside of our control and we cannot guarantee that the trading volume will increase in the near future or that, even if it does increase in the future, it will be maintained. Without a large float, our common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may be more volatile. In addition, in the absence of an active public trading market, an investor may be unable to liquidate his investment in us. Trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float was larger. We cannot predict the prices at which our common stock will trade in the future.

We do not currently pay any dividends on our common stock.

We have not paid any dividends on our common stock in the last fourteen years. We anticipate that for the foreseeable future we will continue to retain any earnings for use in the operation of our business, except as we may elect to pay dividends on the Series A Convertible Preferred Stock. Any future determination to pay cash dividends will be at the discretion of our board of directors, after consideration of any restrictions on cash dividends as defined by our credit and preferred stock agreements, and will depend on our earnings, capital requirements, financial condition and other factors deemed relevant by our board of directors.

The common stock warrants and shares of Series A convertible preferred stock are deemed under generally accepted accounting principles to contain embedded derivative financial instruments, the periodic valuation of which may result in us recognizing charges due to changes in the market value of these derivative financial instruments.

In accordance with FASB 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” the common stock warrants and

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embedded derivatives in the Series A Convertible Preferred Stock are classified as derivative liabilities and, therefore, their fair values are recorded as derivative liabilities on our balance sheet. Changes in the fair value of the warrants and derivatives will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in our statement of operations. We are required to assess these fair values of derivative liabilities each quarter and as the value of the warrants and derivatives is quite sensitive to changes in the market price of our stock, among other things, fluctuations in such value could be substantial and could cause our results to not meet the expectations of securities analysts and investors. These fluctuations will continue to impact our results of operations as described above for as long as the warrants and derivatives are outstanding. For the year ended December 31, 2006, we recognized income of $4.6 million related to the change in the fair value of these derivatives. See Note 12, Derivative Instruments.

We have identified material weaknesses in our internal control over financial reporting that may prevent us from being able to accurately report our financial results or prevent fraud, which could harm our business and operating results, the trading price of our stock and our access to capital.

In connection with the completion of its audit of, and the issuance of an unqualified report on, the Company’s consolidated financial statements for the fiscal year ended December 31, 2006, our independent registered public accounting firm, Berenfeld, Spritzer, Shechter & Sheer (“BSS&S”), communicated to the Company’s management and Audit Committee that certain matters involving the Company’s internal controls were considered to be “material weaknesses”, as defined under the standards established by the Public Company Accounting Oversight Board, or PCAOB. These matters pertained to (i) inadequate policies and procedures with respect to review and oversight of financial results to ensure that accurate consolidated financial statements were prepared and reviewed on a timely basis, (ii) inadequate number of individuals with U.S. GAAP experience and (iii) inadequate review of account reconciliations, analyses and journal entries.

An evaluation of our disclosure controls and procedures as of December 31, 2006, was performed by our Chief Executive Officer and Chief Financial Officer, who is also acting as our Principal Financial and Accounting Officer. Based on that evaluation, these officers concluded that, as of December 31, 2006, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. Accordingly, the material weaknesses noted at December 31, 2005 still existed at December 31, 2006. See “Item 9A - Controls and Procedures” for further discussion.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain an adequate internal control structure and procedures for financial reporting and assess on an on-going basis the design and operating effectiveness of our internal control structure and procedures for financial reporting. We are committed to continuously improving our internal controls and financial reporting, and are working towards meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act.

However, to the extent our independent registered public accounting firm is required to provide an opinion as to the effectiveness of our internal controls, even if we are able to take remedial actions to correct the identified material weaknesses described above and any other material weaknesses identified as the evaluation and testing process is completed, there may be insufficient time for the remediated controls to be in operation to permit our independent registered public accounting firm to conclude that the remediated controls are effective. Thus, our independent registered public accounting firm would possibly provide an adverse opinion to the effect that our internal controls are ineffective as of the date of such evaluation, or may decline to issue an opinion as to the effectiveness of our internal controls.

Under current regulations, we must be able to comply with the provision of Section 404 of the Sarbanes-Oxley Act of 2002 by our reporting period ending December 31, 2007. If we are unable to conclude that our internal controls over financial reporting are effective at such time that we will be required to attest to them our ability to obtain additional financing on favorable terms could be materially and adversely affected, which, in turn, could materially and adversely affect our business, our financial condition and the market value of our securities. In addition, if we are unable to conclude our internal controls or disclosure controls are effective at December 31, 2007, the date that we will be required to attest to them, current and potential shareholders could lose confidence in our financial reporting and our stock price could be negatively impacted.

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We have incurred and will continue to incur increased costs as a result of securities laws and regulations relating to corporate governance matters and public disclosures.

The Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission’s rules implementing that Act have required changes in some of our corporate governance practices and may require further changes. These rules and regulations have increased our legal and financial compliance costs and have made some activities more difficult, time-consuming or costly. These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our board of directors and qualified members of our management team.

We are taking steps to comply with the laws and regulations in accordance with the deadlines by which compliance is required, however, our estimate of the amount or timing of additional costs that we may incur to respond by these deadlines may not be accurate.

We are subject to a financial covenant under the Series A Convertible Preferred Stock which restricts our ability to incur indebtedness and could have an adverse effect on our results of operations.

We are subject to a financial covenant under the Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock contains a financial covenant imposing a restriction on our ability to incur additional indebtedness. As a result, so long as any shares of Series A Convertible Preferred Stock remain outstanding, we will not be able to allow our indebtedness ratio to exceed a specified maximum leverage amount. Our failure to comply with this indebtedness ratio covenant could result in an event of default, which, if not cured or waived, could permit holders of the Series A Convertible Preferred Stock to require us to redeem all, or a portion of, the outstanding principal amount of the Series A Convertible Preferred Stock and pay all accrued but unpaid dividends.

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Risk Factors Relating to our Electronic Security Services Division

We intend to continue our strategy of developing a strong regional presence and, as a result, experience significant growth, some of which may adversely affect our operating results, financial condition and existing business.

To date, we have acquired Security Equipment Company, Starpoint, Coastal and Guardian and plan to continue to acquire additional electronic security service companies. Acquisitions can divert management’s attention and result in greater administrative burdens and operating costs and, to the extent financed with debt, additional interest costs. We may not be able to manage or integrate acquired companies or businesses successfully. The success of our acquisition strategy will depend on, among other things:

• the availability of suitable candidates;

• purchase price multiples which may escalate as a result of increased competition from other electronic security services companies for the purchase of available candidates;

• our ability to value those candidates accurately and negotiate favorable terms for those acquisitions;

• the availability of funds to finance acquisitions; and

• the availability of management resources to oversee the integration and operation of the acquired businesses.

Financing for the acquisitions may come from several sources, including our existing cash on hand, the proceeds from the exercise of outstanding warrants, the incurrence of indebtedness or the issuance of additional common stock, preferred stock, debt (whether convertible or not) or other securities. The issuance of any additional securities could, among other things:

• result in substantial dilution of the percentage ownership of our common shareholders at the time of issuance;

• result in the substantial dilution of our earnings per share;

• adversely affect the prevailing market price of our common stock; and

• result in increased indebtedness, which could negatively affect our liquidity and operating flexibility.

Our inability to continue to acquire businesses in the electronic security services industry could have adverse consequences on our results of operations.

Due to the continuing consolidation of the electronic security systems industry and the acquisition by us and other electronic security systems companies of a number of large portfolios of subscriber accounts, there may in the future be fewer large portfolios of subscriber accounts available for acquisition. We face competition for the acquisition of portfolios of subscriber accounts, and we may be required to offer higher prices for subscriber accounts we acquire in the future than we have offered in the past. A core component of our regional strategy is the acquisition of electronic security services businesses which will enable us to develop a leading regional presence in certain targeted markets and benefit from the increased brand recognition, maximization of market share and improved operating efficiencies that we believe will accompany this position. If we are unable to continue our acquisition program, we may be unable to achieve this regional presence in some or all of the markets we have targeted, which would have an adverse effect on our results of operations.

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Integrating our acquired businesses may be disruptive to or cause an interruption of our business which could have a material adverse effect on our operating results and financial condition.

The process of integrating our acquired businesses may be disruptive to our business and may cause an interruption or a loss of momentum in our business as a result of the following factors, among others:

• loss of key employees or customers;

• higher than expected account attrition;

• Each of SEC, Starpoint, Coastal and Guardian acquisitions currently use a combination of different technology platforms for back-office support and security systems monitoring that will have to be integrated to achieve our objectives of growth and profitability. We plan to fully integrate the back-office software platforms for each of our acquired operations to a new single, unified platform. As with any technology switchover, we run the risk of potential operational challenges and service disruptions that could negatively impact our operations.

• failure to maintain the quality of services that the companies have historically provided; and

• the need to coordinate geographically diverse organizations.

These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue enhancements and other benefits from that integration and may cause material adverse short and long-term effects on our operating results and financial condition.

We have encountered and may continue to encounter difficulties implementing our business plan.

These challenges and difficulties relate to our ability to do the following:

Attract new customers and retain existing customers. Within the electronic security services division, customers, particularly residential customers, move from the locations at which our security systems were installed. This creates expected and ongoing attrition. There are no guarantees that persons or businesses moving into these locations will use our company, or any company, for security services. In the event of a slow down in the real estate or new home construction in our key market in Florida, we could experience periods in which we are not able to replace the natural attrition of residential customers.

Generate sufficient cash flow from operations or through additional debt or equity financings to support our regional growth strategy. Our security operations face significant competition and pricing pressure from other national and regional service providers in our industry. If we are unable to compete successfully with these companies, our sales and profitability could be adversely affected. Our rates of customer attrition may affect our ability to remain in compliance with certain covenants in our debt agreements and the capital needed to replace the customers lost through attrition is reliant on availability of operating cash flow after servicing our debt agreements and availability from existing credit facilities.

Install and implement new financial and other operating systems, procedures and controls to support our regional growth strategy with minimal delays. Our growth plans have relied and continue to rely on the acquisition of smaller security companies and obtaining operating cost efficiencies by servicing more customers through a single more efficient infrastructure.

If we fail to generate sufficient cash flow from operations, it may be necessary to take additional actions, which could divert management’s attention and strain our operational and financial resources. We may not successfully address any or all of these challenges, and our failure to do so would adversely affect our business plan and results of operations, our ability to raise additional capital and our ability to achieve enhanced profitability.

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We have a history of losses, which are likely to continue.

We incurred net losses from continuing operations of $29.7 million for the year ended December 31, 2006, and $15.4 million for the year ended December 31, 2005.

These losses reflect the following, among other factors:

• substantial charges incurred by us for amortization of customer accounts;

• impairment of assets;

• interest incurred on indebtedness;

• acquisition integration costs;

• costs relating to additional financing in 2006 and recapitalization costs in 2005;

• a reduction of deferred tax assets in 2006; and

• other charges required to manage operations.

We will continue to incur a substantial amount of interest expense and amortization of customer accounts and we do not expect to attain profitability in the near future.

Our electronic security services operations are geographically concentrated making us vulnerable to economic and environmental risks inherent to those locations.

Our subscriber base is geographically concentrated in Florida and New York. Accordingly, our performance may be adversely affected by regional or local economic and environmental conditions, including weather conditions, particularly in Florida, which is susceptible to the impact of hurricanes, lightning and tornadoes. Local environmental conditions such as hurricanes making landfall in Florida have caused damage to infrastructure such as electric power and telecommunications, both of which are required to provide service to our security customers. If electric power is not available for an extended period of time, we would be unable to provide our services and would therefore be unable to bill our customers. If the hurricanes destroy or cause severe damage to homes, then we are at risk of losing our customer base.

Our electronic security services division operates in a highly competitive environment and we may not be able to compete effectively for customers, causing us to lose all or a portion of our market share.

The electronic security services business in the United States is highly competitive. New competitors are continually entering the field. Competition is based primarily on price in relation to quality of service. Sources of competition in the electronic security services industry are other providers of central monitoring services, local electronic security systems and other methods of protection, such as manned guarding.

Our electronic security services division competes with other major firms which have substantial resources, including ADT Security Services, Inc. (a subsidiary of Tyco International Limited), Brinks Home Security, a division of The Brinks Company, Protection One and HSM Electronic Protection Services, a division of the StanleyWorks, as well as many regional and local companies. Many of these competitors are larger and have significantly greater resources than we do and may possess greater local market knowledge as well. We may not be able to continue to compete effectively for existing or potential customers, causing us to lose all or a portion of our market share.

Increased adoption of “false alarm” ordinances by local governments may adversely affect our business.

An increasing number of local governmental authorities have adopted, or are considering the adoption of, laws, regulations or policies aimed at reducing the perceived costs to municipalities of responding to false alarm signals. Such measures could include:

• requiring permits for the installation and operation of individual alarm systems and the revocation of such permits following a specified number of false alarms;

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• imposing fines on alarm customers or alarm monitoring companies for false alarms;

• imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms;

• requiring further verification of an alarm signal before the police will respond

Enactment of these measures could adversely affect our future business and operations. In addition, concern over false alarms in communities adopting these ordinances could cause a decrease in the timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services.

Future government regulations or other standards could have an adverse effect on our operations.

Our operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to obtain licenses or permits, to comply with standards governing employee selection and training and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws, regulations and/or licensing requirements change, we may be required to modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse effect on us.

Increased adoption of statutes and governmental policies purporting to void automatic renewal provisions in our customer contracts, or purporting to characterize certain of our charges as unlawful, may adversely affect our business.

Our customer contracts typically contain provisions automatically renewing the term of the contract at the end of the initial term, unless cancellation notice is delivered in accordance with the terms of the contract. If the customer cancels prior to the end of the contract term, other than in accordance with the contract, we may charge the customer the charges that would have been paid over the remaining term of the contract, or charge an early cancellation fee.

Several states have adopted, or are considering the adoption of statutes, consumer protection policies or legal precedents which purport to void the automatic renewal provisions of our customer contracts, or otherwise restrict the charges we can impose upon contract cancellation. Such initiatives could compel us to increase the length of the initial term of our contracts, and increase our charges during the initial term, and consequently lead to less demand for our services and increase our attrition. Adverse judicial determinations regarding these matters could cause us to incur legal exposure to customers against whom such charges have been imposed, and the risk that certain of our customers may seek to recover such charges through litigation. In addition, the costs of defending such litigation and enforcement actions could have an adverse effect on us.

Cyclical industry and economic conditions have affected and may continue to adversely affect the financial condition and results of operations of our electronic security services division.

The operating results of our electronic security services division may be adversely affected by the general cyclical pattern of the electronic security services industry. Demand for electronic security services is significantly affected by levels of commercial construction and consumer and business discretionary spending. The market for new construction and the real estate market in general are cyclical and, in the event of a decline in the market for new developments, it is likely that demand for our electronic security monitoring services would also decline, which could negatively impact our results of operations.

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Our electronic security services division’s business is subject to attrition of subscriber accounts.

Our electronic security services division experiences attrition of subscriber accounts as a result of, among other factors, relocation of subscribers, adverse financial and economic conditions, and competition from other electronic security system companies. In addition, our electronic security services division experiences attrition of newly acquired accounts to the extent that we do not integrate these accounts or do not adequately service the accounts or because of dissatisfaction with prior service. Attrition and an increase in attrition rates could have a material adverse effect on our revenues and earnings, and our ability to maintain compliance with various covenants in our credit facilities.

Lower crime rates could have an adverse effect on our results of operations.

For the past several years crime rates have been dropping in the United States, particularly in the State of Florida. According to the Florida Department of Law Enforcement’s 2005 Annual Uniform Crime Report, Florida’s index crime rate has reached a 35-year low dropping by 3.7 percent in 2005, compared to 2004. Particularly relevant to our business is the decrease in the number of burglaries. While the number of homes and businesses with installed electronic security systems has continued to increase even as crime rates have decreased, this may not continue to be the case. Any significant decrease in the number of homes and businesses installing new electronic security systems could have a material adverse effect on our business.

We rely on technology that may become obsolete, which could require significant capital expenditures.

Our monitoring services depend upon the technology (hardware and software) of security alarm systems. In order to maintain our customer base that currently uses security alarm components that are or could become obsolete, we will likely be required to upgrade or implement new technologies that could require significant capital expenditures. We may not be able to successfully implement new technologies or adapt existing technologies to changing market demands. If we are unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.

Shifts in our current and future customers’ selection of telecommunications services could increase customer attrition and could adversely impact our earnings and cash flow.

Certain elements of our operating model rely on our customers’ selection and continued use of traditional, land-line telecommunications services, which we use to communicate with our monitoring operations. In recent years, many customers have shown a preference for subscribing only to cellular technology and have discontinued use of land-line telephone services. In order to continue to service existing customers who cancel their land-line telecommunications services and service new customers who do not subscribe to land-line telecommunications services, customers must upgrade to alternative and typically more expensive wireless or internet based technologies. . Continued shifts in customers’ preferences regarding telecommunications services could continue to adversely impact attrition and our earnings and cash flow.

The loss of our Underwriter Laboratories listing could negatively impact our competitive position.

All of our alarm monitoring centers are UL listed. To obtain and maintain a UL listing, an alarm monitoring center must be located in a building meeting UL’s structural requirements, have back-up and uninterruptible power supplies, have secure telephone lines and maintain redundant computer systems. UL conducts periodic reviews of alarm monitoring centers to ensure compliance with their regulations. Non-compliance could result in a suspension of our UL listing. The loss of our UL listing could negatively impact our

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competitive position

We are exposed to greater risks of liability for employee acts or omissions, or system failure, than may be inherent in other businesses.

The nature of the services we provide potentially exposes us to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses. In an attempt to reduce this risk, substantially all of our alarm monitoring agreements and other agreements pursuant to which we sell our products and services contain provisions limiting our liability to customers and third parties. However, in the event of litigation with respect to such matters, these limitations may not be enforced. In addition, the costs of such litigation could have an adverse effect on us.

The Company carries insurance of various types, including general liability and professional liability insurance in amounts management considers adequate and customary for the industry. Some of the Company’s insurance policies, and the laws of some states, may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence. If the Company incurs increased losses related to employee acts or omissions, or system failure, or if the Company is unable to obtain adequate insurance coverage at reasonable rates, or if the Company is unable to receive reimbursements from insurance carriers, the Company’s financial condition and results of operations could be materially and adversely affected.

Risk Factors Relating to our Materials Division and Construction Division

Petit, a vendor and landlord of ours in St. Martin, continues to indicate that he believes court intervention will be required to compel compliance by us with respect to the terms of the settlement agreement settling a previous dispute we had with Petit.

We have an ongoing dispute with Petit, a vendor and landlord, which dates back to 2004, related to a materials supply agreement. In March 2007, Petit blocked access to our ready-mix batch plant and quarry in St. Martin. We have temporarily shut down operations and no revenue is being realized. Under French law, we remain liable for a portion of our employees’ wages. Accordingly, until we can enforce what we believe to be valid easements to the parcels on which we conduct our operations, or until we can reach a satisfactory settlement, we will incur operating losses which at this time are not estimable. Petit has also challenged the validity of our September 2006 exercise of an option to acquire the parcel of land on which substantially all remaining aggregate reserves are located. The extension of a land lease, beyond December 31, 2006, for a parcel on which the quarry’s crushing equipment and the ready-mix batch plant are located is contingent upon the aforementioned option being validly exercised. In addition, there is a further dispute with respect to the location of a 6,000 square meter parcel referenced in the aforementioned land lease and which is critical to the quarry operations.

If we cannot successfully enforce our easements and resolve our disputes with respect to the option and land lease, our operations will remain shut down and we may be forced to liquidate our operations in St. Martin. See Item 3 “Legal Proceedings”.

We have entered into transactions with our affiliates which result in conflicts of interests.

We have entered into a number of transactions with our affiliates, including but not limited to an investment in the Caribbean involving companies in which certain of our current and former officers and directors have an interest. Material transactions are disclosed in our audited consolidated financial statements and the periodic reports we file with the Securities and Exchange Commission. See “Item 13 — Certain Relationships and Related Transactions”. These transactions result in conflicts of interests. Our Audit Committee reviews and approves transactions between us and our affiliates, including our officers and directors. Our policy is that all of these transactions be reviewed and approved by the audit committee prior to completion. In addition, our Articles of Incorporation provide that no contract or other transaction between us and any other corporation shall in any way be invalidated by the fact that any of our directors are interested in or are directors or officers of the other party to the transaction.

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We are subject to some risks due to the nature of our foreign operations.

The majority of our continuing operations in 2006 were conducted in foreign countries located in the Caribbean, primarily Antigua and Barbuda, Sint Maarten, St. Martin and the Bahamas. For the fiscal year ended December 31, 2006, 38% of our revenue was derived from foreign geographic areas. The risks of doing business in foreign areas include potential adverse changes in U.S. diplomatic relations with foreign countries, changes in the relative purchasing power of the U.S. dollar, hostility from local populations, adverse effects of exchange controls, changes in either import or export tariffs, nationalization, interest rate fluctuations, restrictions on the withdrawal of foreign investment and earnings, government policies against businesses owned by non-nationals, expropriations of property, the instability of foreign governments, any civil unrest or insurrection that could result in uninsured losses and other political, economic and regulatory conditions, risks or difficulties. Adverse changes in currency exchange rates or raw material commodity prices, both in absolute terms and relative to competitors’ risk profiles, could adversely impact our operations. We are not subject to these risks in the U.S. Virgin Islands, since the Virgin Islands is a United States territory. We believe our most significant foreign currency exposure is the Euro. We are also subject to U.S. federal income tax upon the distribution of certain offshore earnings. Although we have not encountered significant difficulties in our foreign operations, we could encounter difficulties in the future.

Some of our construction contracts have fixed price terms which do not take into account unanticipated changes in production costs, which we would not be able to pass on to the customer.

We generally enter into either fixed-price contracts that provide for an established price that does not vary during the term of the contract or unit-price contracts under which our fee is based on the quantity of work performed. Fixed-price and unit-price contracts involve inherent risks, such as unanticipated increases in the cost of labor and/or materials, subcontracts that were unexpected at the time of bidding, bidding errors, unexpected field conditions, adverse weather conditions, the inability of subcontractors to perform, work stoppages and other events beyond our control. Although our attempts to minimize the risks inherent in our contracts by, among other things, obtaining subcontracts from reliable subcontractors, anticipating labor and material cost increases, anticipating contingencies, utilizing our cost control system and obtaining certain cost escalation clauses, we cannot provide assurance that we will be able to complete our current or future contracts at a profit. In addition, the longer the term of fixed-price and unit-price contracts, the greater the risks associated with that contract.

We may incur specified penalties or losses under some of the clauses in the contracts governing our projects.

Some of our contracts provide for significant penalties (liquidating damages) for not completing the projects by specified substantial completion dates. The original substantial completion dates may be extended by change orders under circumstances provided in the contracts. However, we have experienced delays on some projects caused by circumstances which do not permit and extension of the substantial completion date. In 2005, we accrued for $0.8 million of liquidating damages with respect to our marina project in the U.S. Virgin Islands.

General economic conditions in the markets in which we conduct business could have a material impact upon our operations.

Our construction division has been and our materials division is materially dependent upon economic conditions in general, including recession, inflation, deflation, general weakness in construction and housing markets, changes in infrastructure requirements and, in particular, upon the level of development and construction activities in the Caribbean. A general downturn in the economy in this region would adversely affect the housing and construction industry and, therefore, would adversely affect our contracting and concrete and related products businesses.

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Our materials division operates in a highly competitive environment and we may not be able to compete effectively for customers, causing us to lose all or a portion of our market share.

We have competitors in the materials business in the locations where we conduct business. The competition includes local ready-mix concrete, and importers of aggregates and concrete blocks. We also encounter competition from the producers of asphalt, which is an alternative material to concrete for road construction. Most competitors have a disadvantage to us with respect to our material costs, but have an advantage over us with respect to lower overhead costs.

We are highly dependent on supplies of cement, concrete block, aggregates and sand and a failure to maintain adequate supplies would adversely affect our operations.

Our operations are highly dependent upon our ability to acquire adequate supplies of cement, concrete block, aggregates and sand. We have experienced in the past, and could experience in the future, short term shortages of both cement and sand, which would adversely affect our operations.

Some of our significant customers are governmental agencies of islands in the Caribbean which may constitute a credit risk.

We operate on several islands in the Caribbean. The governmental agencies of these islands are significant customers. Many of the island governments with which we conduct business have high levels of public debt relative to their revenue base. Accordingly, we may experience difficulty in collecting amounts due from these governmental agencies.

We are highly dependent on the availability of barging and towing services in the Caribbean.

Our materials division is highly dependent upon the availability of barging services to import sand, aggregate, cement and block. We have experienced in the past, and could experience in the future, a short-term shortage of barging capacity which would have an adverse affect on our operations.

We are in the process of relocating our ready-mix concrete operation on Sint Maarten from a parcel of land being leased on a month-to-month basis pursuant to a verbal agreement and we have not received all the necessary permits to operate a ready-mix batch plant on the leased parcel to which we are relocating.

Should we be required to vacate the parcel of land, being leased on a verbal month-to-month basis, on which our ready-mix batch plant is presently operating before we commission our new ready-mix batch plant on our parcel under lease through 8/2006, we would be unable to produce any ready-mix concrete, which is our primary source of revenue in Sint Maarten. An inability to produce ready-mix concrete would have a material adverse effect upon the results of operations for our materials division.

On March 21, 2007, we sold substantially all of our construction division assets and we believe we have the following risks related to the sale.

• We have leased to the buyer or terminated substantially all of the employees of our construction division. Accordingly, we must either secure approval for the assignment of our construction contracts or, to the extent we are unable to obtain this approval, subcontract for any required construction services under the contracts. We may, as a condition for securing the approval for the assignment, remain contingently liable under some or all of the contracts and any related payment and performance bonds. In addition, the buyer is in the process of establishing legal entities, securing the necessary work permits, and obtaining the required business licenses to operate in the foreign jurisdictions in which we have contractual obligations under construction contracts. The failure of the buyer to establish the legal entities and secure the necessary licenses and permits may have an adverse effect on the effectiveness of our assignment of the active construction contracts

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to the buyer or our ability to enter into subcontracts with the buyer or may require us to enter into subcontracts with other contractors to execute our obligations under active contracts as opposed to our preference, which is assigning such contracts to the buyer. We may not be able to enter into subcontracts on terms that we believe are favorable to us, either as to price and/or timing. Delays under certain of our contracts may expose us to liquidating damages and/or monetary claims from our customers.

• We must obtain approval of our customers to assign certain of our construction contracts. We may not be able to secure the approval of our customers to assign certain of our construction contracts. Our customers may also require approval from third-parties (lenders or dual obligees under payment and performance bonds) in order to consent to any assignment. Should we be unsuccessful in securing approval for the assignment of any of our active construction contracts, we would be required to enter into subcontracts for the execution of our remaining obligations. We may not be able to enter into subcontracts on terms that are favorable, either as to price and/or timing. Delays under certain of our contracts may expose us to liquidating damages and/or monetary claims from our customers. In certain jurisdictions, we are subject to a gross receipts tax. Should we be required to enter into subcontracts for the execution of our remaining obligations, our costs would be increased to the extent of any gross receipts tax included in the subcontract.

• We have exposure under outstanding payment and performance bonds on construction contracts. If we are unable to secure the release of our outstanding bonds and our assignees or subcontractors are unable to satisfy our contractual obligations, the parties to whom we owe obligations under these bonds may elect to enforce their rights. Should these parties elect to enforce their rights, it could have a material adverse effect on our company. The parties to whom we owe obligations under our outstanding payment and performance bonds have the ability, under certain circumstances, to terminate our construction contracts, pay our subcontractors, complete the works under the construction contract, and seek indemnity from us. If these parties exercise any or all of these rights, it could have a material adverse effect upon us.

• We are currently negotiating adjustments (both change orders and liquidating damages) to the contract sums set forth in some of our construction contracts, which will affect the allocation of contract revenues and costs. The sale of substantially all of our construction division’s fixed assets and the termination of substantially all of its employees may adversely affect our ability to successfully negotiate these adjustments by reducing the amount of leverage we have in negotiating with our customers, particularly in light of needing to seek their approval for assignment of certain construction contracts.

• One of the principals of the buyer is also a current director, former President and CEO and founder of our company. The negotiation, execution and closing of the sale of substantially all the fixed assets of our construction division constitutes a related party transaction, which is subject to inherent conflicts of interest. The sale was approved by our audit committee.

Item 1B. Unresolved Staff Comments

Not applicable.

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Item 2. Property

General

The following table shows information on the properties and facilities that we owned or leased for our operations at December 31, 2006:

Description	Location	Lease Expiration with all Options (M/Yr)
Shared Facilities
Principal executive offices	Boca Raton, Florida	8/19(1)
Maintenance yard for heavy equipment	Deerfield Beach, Florida	12/07(2)(3)(7)
Administrative Offices	Deerfield Beach, Florida	5/09(8)

Electronic Security Services Division
Sales office	Panama City, Florida	Owned
Sales office	Bonita Springs, Florida	02/11
Sales office	Doral, Florida	05/07
Sales office	Boca Raton, Florida	08/10
Sales office	Winter Park, Florida	04/07
Sales office	Tampa, Florida	12/11
Sales office	Sarasota, Florida	11/07
Sales office	Pensacola, Florida	09/07
Sales office	Staten Island, New York	07/08
Sales office and central monitoring station	New York, New York	12/09
Sales office and central monitoring station	Hollywood, Florida	12/07
Administrative offices	Boca Raton, Florida	05/07

Materials Division	Location	Lease Expiration with all Options (M/Yr)
Concrete batch plant	Sint Maarten	Month to Month (2) (4)
Barge unloading facility		4/2013 (2)
Administrative offices and warehouse	Sint Maarten	3/2014
Vacant Land	Sint Maarten	8/2066 (6)
Quarry	St. Martin	Owned
Quarry	St. Martin	Optioned (5)
Concrete batch plant, rock crushing plant, quarry and office	St. Martin	6/2011
Construction Division	Location	Lease Expiration with all Options (M/Yr)
Administrative office	St. Thomas, USVI	Month to Month
Administrative office	Free Port, Grand Bahamas	Month to Month
Equipment and supplies storage	St. Thomas, USVI	Month to Month

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(1) Ten year lease with a 5-year option to renew.

(2) Underlying land is leased and we own the equipment and temporary office facilities on the property.

(3) Leased from the wife of Donald L. Smith Jr., a director of the Company. See Note 21, Commitments and Contingencies.

(4) The lease expired in June 2006 and the landlord verbally extended the lease through October 2006, at which time we entered into an agreement to lease the property on a month to month basis.

(5) See Item 1A. Risk Factors Petit and Item 3. Legal Proceedings – Petit.

(6) We are in the process of securing permits necessary to commission a new ready-mix batch plant on this parcel.

(7) This lease was assigned in connection with the March 21, 2007 sale of certain assets of our construction division. See Note 26, Subsequent Events.

(8) This office space has a sublease arrangement.

Quarry Information at

December 31, 2006

Quarry Name And Location	Material Type Produced	Type of Facility	Ownership or Lease Status	Annual Production Tons	Estimated Years Until Reserve Depletion
Grand Case, French West Indies	Boulders Stone & Sand	Surface Mine	Option to Own	`120,000	1.0	(1)

(1) See Item 1A Risk Factors Petit and Item 3. Legal Proceedings-Petit.

For additional information about our obligations on property leases, please see Note 21, Commitments and Contingencies and Note 26, Subsequent Events.

Item 3. Legal Proceedings

The Company is involved in routine litigation arising in the ordinary course of its business, primarily in connection with its construction division.

Series A Convertible Preferred Stock Holder

On January 31, 2007, an investor who holds 7,000 of the 45,000 outstanding shares of our Series A Convertible Preferred Stock, but was not a party to certain Forbearance Agreements entered into by the other two holders of the Series A Convertible Preferred Stock, transmitted a notice of redemption to us alleging we failed to timely pay certain registration delay payments purportedly owed to this investor constituting a “Triggering Event” which purportedly gave this investor the right to require us to redeem all shares of Series A Convertible Preferred Stock held by this investor. On April 3, 2007, after the other investors had entered into the Forbearance Agreements with us, this same investor transmitted a second notice of redemption to us again alleging we had failed to timely pay the registration delay payments to this investor purportedly constituting a Triggering Event which gave such investor the right to require us to redeem all shares of Series A Convertible Preferred Stock held by this investor. The investor had given us the option of accepting certain restructuring terms which we did not believe would be in the best interests of our shareholders or redeeming the shares of Series A Convertible Preferred Stock that are held by this investor.

On April 25, 2007, this investor filed a lawsuit (the “Lawsuit”) in the United States District Court for the Southern District of New York repeating these allegations and requesting specific performance compelling us to redeem all 7,000 shares of Series A Convertible Preferred Stock from and pay any delinquent registration delay payments to this investor or, in the alternative, damages for breach of contract. The investor held shares of the Company’s Series A Convertible Preferred Stock with a face value equal to $7,000,000. The Company did not believe that a liability for any registration delay payments in accordance with the Registration Rights Agreement was warranted as it believed the lawsuit to be without merit.

On August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement Agreement”) pursuant to which, subject to the payment of the Settlement Amount set forth below, the Company resolved all claims against the Company set forth in the Lawsuit. Pursuant to the Settlement Agreement, on September 28, 2007, the Company paid one of the plaintiffs in the Lawsuit an amount equal to $7.4 million which included all accrued dividends since January 1, 2007 (the “Settlement Amount”) and the plaintiffs returned all shares of the Company’s Series A Convertible Preferred Stock held by them to the Company. In return, all parties to the Lawsuit entered into mutual releases releasing each other from any and all claims.

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Yellow Cedar

In the fall of 2000, VICBP a subsidiary of ours, was under contract with the Virgin Islands Port Authority, or VIPA, for the construction of the expansion of the St. Croix Airport. During the project, homeowners and residents of the Yellow Cedar Housing Community, located next to the end of the expansion project, claimed to have experienced several days of excessive dust in their area as a result of the ongoing construction work and have claimed damage to their property and personal injury. The homeowners of Yellow Cedar have filed two separate lawsuits for unspecified damages against VIPA and VICBP as co-defendants. One suit, filed in the U.S. District Court for the District of the Virgin Islands by Mariepaul Antoine, Benjamin Ashe, et. al, vs. VIPA et. al, case #2001,63 R/F, seeks equitable relief from nuisance, specific performance and damages. The second suit, Louisa Williams et. al vs. VIPA et. al filed in the Territorial Court of the U.S.V.I. case #548/2000 also seeks equitable relief from nuisance, specific performance and damages. In both cases VICBP, as defendant, has agreed to indemnify VIPA for any civil action as a result of the construction work. VICBP has brought a declaratory judgment action in the District Court of the Virgin Islands to determine whether there is coverage under the primary policy.

Reliance Insurance Company, the insurer for the primary general liability policy for VICBP during that period, has taken the legal position that “dust” is a pollutant and, therefore, the pollution exclusion clause applies and, as a result, Reliance denies liability insurance coverage to VICBP. The Pennsylvania Insurance Commissioner placed Reliance in rehabilitation in October 2001, and subsequently into liquidation. VICPB has also presented claims under the policy to the Florida Insurance Guaranty Association, the V.I.

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Insurance Guaranty Association, the Pennsylvania Insurance Commissioner, and to its excess liability insurance carrier, Zurich Insurance Company.

The two lawsuits by the homeowners and residents of Yellow Cedar Housing Community are more appropriately described as a single litigation event entered by individual claimants. As the case progresses, a determination will be made as to consolidation into a class action or each claim decided on its merit. Currently, VICPB’s management cannot determine what the eventual outcome will be as to whether the claims will remain individual or consolidated into one action.

Additional information regarding this legal action appears below:

• Regarding number of claimants:

• The original claim had 113 claimants.

• In an amended complaint, 124 claimants were added.

• As plaintiffs have failed to appear for depositions, or they have been found to not be a party in legal claim, they have been removed. Initial scheduled depositions are still forthcoming, so additional claimants may be removed.

• As of December 31, 2006, some of the potential claimants who were minors at the time of the occurrence have not filed suit upon reaching majority and may have exceeded the statute of limitations for filing a claim, further reducing the number of claimants. Until actual birth dates are determined through deposition, this number cannot be accurately determined.

• Per the Fifth Amended Complaint, there are currently 175 claimants including men, women and children, or a net reduction of 62 claimants from the 237 total claims filed.

• Regarding when the lawsuits were filed:

• Original claim was filed on October 17, 2000.

• The claim has since been dismissed and the matter consolidated into the other case, which was filed on April 6, 2001.

• Regarding estimation of loss:

• Initial complaints from homeowners and residents were handled directly with the claimants in conjunction with the Virgin Island Port Authority. Many of the claimants received compensation and signed releases in favor of the Virgin Island Port Authority and VICBP.

• Once the lawsuits were filed, direct contact with claimants was discontinued.

• The claim was then reported to the primary liability and excess liability insurance carriers that provided coverage during the period of the lawsuit. Both insurance companies denied coverage based upon the pollution exclusion in the policy.

• VICBP’s position is that dust was not a pollutant under the policy definitions, and VICBP has filed a Summary Judgment action against the primary coverage provider, Reliance Insurance Company. Since Reliance is currently in liquidation, the claim has reverted to the Virgin Island Insurance Guaranty Association.

• Under the Virgin Island Insurance Guaranty Association Act, the Association, if responsible, will pay in excess of $50 per claim to a maximum of $50,000 per claim.

• Exposure to VICBP depends on the outcome of the Summary Judgment and the determination on the number of actual individual claims. Although the Yellow Cedar claims are currently provided as separate claims, VICBP believes the number of claims will be further reduced as the initial releases and compensation paid to certain claimants is identified by the Court.

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• VICBP believes a significant event occurred when a certain claimant who was the organizer of the homeowners association withdrew her complaint. She was filing her claim under a power of attorney for a deceased relative, which relative was found to have been deceased before the power of attorney was dated. Additionally, the lead counsel representing the claimants has retracted the medical exam performed by the lead counsel’s expert medical examiner because the date of the exam also occurred after the claimant’s relative was reportedly dead.

• Based on opinion of counsel, although we cannot assure you the conclusions set forth in it are accurate predictors of future events, VICBP believes dust will not be found to be a pollutant and coverage will apply.

• If the Summary Judgment is favorable to us, VICBP would be liable for the $50 per claim and original $50,000 deductible. However, this was satisfied when the initial claims were resolved with claimants.

• VICBP cannot accurately estimate actual damages to the claimants since a significant part of the property damage claims were resolved prior to the litigation and credible evidence of the bodily injury portion of the lawsuit has not been presented.

• Additionally, because the legal process continues, VICBP is unable to determine how all of the facts outlined above will be resolved under St. Croix environmental law. As a result of all the uncertainties, the loss is not probable or reasonably estimable, and we are unable to estimate the loss, if any, in accordance with SFAS 5. However, we do not believe that the outcome will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

Le Flamboyant

In the late 1980s, Bouwbedrijf Boven Winden, N.V., or BBW, currently a Devcon subsidiary in the Netherlands Antilles, supplied concrete to a large apartment complex in St. Martin. In the early 1990s the buildings began to develop exterior cracking and “pop outs.” In November 1993, BBW was named one of several defendants, including the building’s insurer, in a suit filed by Syndicat des Copropriétaires la Résidence Le Flamboyant (condominium owners association of Le Flamboyant) in the French court “Tribunal de Grande Instance de Paris”, case No. 510082/93. A French court assigned an expert to examine the cause of the cracking and pop outs and to determine if the cracking/pop outs are caused by a phenomenon known as alkali reaction, or ARS. The expert found, in his report dated December 3, 1998, that BBW was responsible for the ARS. The plaintiff is seeking unspecified damages, including demolition and replacement of the 272 apartments. Based on the advice of legal counsel, a judgment assessed in a French court would not be enforceable against a Netherlands Antilles company. Thus, in order to obtain an enforceable judgment, the plaintiff would have to file a successful claim in an Antillean court. It is too early to predict the final outcome of this matter or to estimate the potential risk of loss, if any, to BBW. Due to the lack of enforceability, BBW decided not to continue the defense in the French court. Therefore, BBW may not be aware of recent developments in the proceedings. BBW’s management believes its defenses to be meritorious and does not believe that the outcome will have a material adverse effect on the consolidated financial position, results of operations or cash flows of BBW or our company.

Petit

On July 25, 1995, our subsidiary, Societe des Carrieres de Grande Case ( “SCGC”), entered into an agreement with Mr. Fernand Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, collectively referred to as, Petit, to lease a quarry located in St. Martin. Another lease was entered into by SCGC on October 27, 1999 for the same and additional property. BBW entered into a materials supply agreement with Petit on July 31, 1995. This materials supply agreement was amended on October 27, 1999 and under the terms of this amendment, we became a party to the materials supply agreement.

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In May 2004, SCGC advised Petit that SCGC would possibly be removing their equipment within the time frames provided in their agreements and made a partial quarterly payment under the materials supply agreement. On June 3, 2004, Petit advised us in writing that Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that Petit would not renew the 1999 lease when it expired on October 27, 2004. Petit refused to accept the remainder of the quarterly payment from us in the amount of $45,000.

Without prior notice to BBW, Petit obtained orders to impound BBW assets on St. Martin (the French side) and Sint Maarten (the Dutch side). The assets sought to be impounded included bank accounts and receivables. BBW has no assets on St. Martin, but approximately $341,000 of its assets have been impounded on Sint Maarten. In obtaining the orders, Petit claimed that $7.6 million is due on the supply agreement (the full payment that would be due by us if the contract continued for the entire potential term and we continued to mine the quarry), $2.7 million is due for quarry restoration and $3.7 million is due for pain and suffering for a total claim amounting to $14.0 million. The materials supply agreement provided that it could be terminated by us on July 31, 2004.

In February 2005, SCGC, BBW and Devcon entered into agreements with Petit, which provided for the following:

• The purchase by SCGC of three hectares of land located within the quarry property previously leased from Petit for approximately $1.1 million;

• A two-year lease of approximately 15 hectares of land on which SCGC operates a crusher, ready-mix concrete plant and aggregates storage at a total cost of $100,000, which arrangement was entered into February 2005;

• The granting of an option to SCGC to purchase two hectares of land prior to December 31, 2006 for $2 million, with $1 million due on each of December 31, 2006 and December 31, 2008, subject to the terms below:

• In the event that SCGC exercises this option, Petit agrees to withdraw all legal actions against us and our subsidiaries;

• In the event that SCGC does not exercise the option to purchase and Petit is subsequently awarded a judgment, SCGC has the option to offset approximately $1.2 million against the judgment amount and transfer ownership of the three hectare parcel purchased by SCGC back to Petit;

• The granting of an option to SCGC to purchase five hectares of land prior to June 30, 2010 for $3.6 million, payable $1.8 million on June 30, 2010 and $1.8 million on June 30, 2012; and

• The granting of an option to SCGC to extend the 15 hectare lease through June 30, 2010 (with annual rent of $55,000) if the 2 hectare option is exercised and subsequent extensions, if the 5 Hectare Option is exercised, of the lease (with annual rent of $65,000) equal to the terms of mining authorizations obtained from the French Government agencies.

In February 2005 we purchased the three hectares of land for $1.1 million in cash and executed the 15 hectare lease.

In September 2006 we exercised the 2 hectare option and transferred $1 million in cash to the appropriate agent of Petit. It is currently our intention to make the additional $1 million payment required under the option agreement on December 31, 2008 to the appropriate agent of Petit.

To date, Petit has refused to accept the $1 million payment unless Devcon International Corp., the parent company, agrees to guarantee payment of the $1 million due on December 31, 2008. As Devcon International Corp. was not referenced in or party to the 2 hectare option, we believe that Petit’s request is without merit. Currently, the $1 million remains on deposit with the appropriate third-

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party escrow agent pending the outcome of this dispute. It is management’s position that based on the circumstances leading up to the current legal claims made by Petit, we are unable to either reasonably estimate or determine the outcome of these claims.

Under the terms of the 15 hectare lease, Petit agreed that an adjacent 6,000 square meter parcel, on which SCGC’s aggregate wash plant, scale, maintenance building and administrative offices are located, was included. SCGC has been operating its aggregate wash plant, scale, maintenance building and administrative offices on the adjacent property without incident or dispute with Petit for eleven years. Subsequent to refusing to accept the $1 million option payment, Petit has taken steps to impede SCGC’s ability to access the 6,000 square meters of property, resulting in SCGC’s inability to access the aggregate wash plant, scale, maintenance building and administrative facilities required to carry out its mining operation. Petit now claims that the 6,000 square meters is located elsewhere on the parcel. Currently quarry operations have ceased and sales of mined aggregate to third parties have ceased. However, during 2006, our ready mix operation in St. Martin was not affected. In late 2006, we began importing aggregate from third party vendors in anticipation of the Petit non compliance. In March 2007, Petit blocked access to our ready-mix operation. Accordingly, our ready-mix operation has ceased and we are attempting to enforce easements to our owned and leased parcels. Under St. Martin labor compensation laws, we do not incur the full cost of employee salaries if they are prevented from working under situations such as this dispute.

We have engaged French legal counsel to pursue SCGC’s rights under the agreements executed in February 2005. At this time, it is the Company’s position that any asserted claims would arise from SCGC since it is suffering losses due to its inability to utilize our quarry ready-mix operations. Any claim would be considered a gain contingency and therefore under SFAS No. 5 would not be recorded.

General

In the ordinary course of conducting its business, we may become involved in various legal actions and other claims, some of which are currently pending. Litigation is subject to many uncertainties and management may be unable to accurately predict the outcome of individual litigated matters. Some of these matters possibly may be decided unfavorably to us. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not be material.

We are involved, on a continuing basis, in monitoring our compliance with environmental laws and in making capital and operating improvements necessary to comply with existing and anticipated environmental requirements. While it is impossible to predict with certainty, management currently does not foresee such expenses in the future as having a material effect on our business, results of operations, or financial condition.

We are subject to federal, state and local environmental laws and regulations. Management believes that we are in compliance with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse impact on our consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse impact in the foreseeable future.

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Item 4. Submission of Matters to a Vote of Security Holders

We held our Annual Shareholders’ Meeting on November 10, 2006. The issues submitted to a vote of the security holders and the results of the voting are as follows:

1) Election of nine directors

	For	Against	Withheld
Donald K. Karnes	3,629,308	0	178,124
Gustavo R. Benejam	3,723,174	0	84,258
P. Rodney Cunningham	3,629,508	0	177,924
Mario B. Ferrari	3,559,309	0	248,123
Richard L. Hornsby	3,564,806	0	242,526
Per Olof Lööf	3,532,868	0	274,564
W. Douglas Pitts	3,644,175	0	163,257
Richard C. Rochon	3,559,309	0	248,123
Donald L. Smith, Jr.	3,559,909	0	247,523

The Board consists of nine directors. All nominees were elected to serve for a one-year period.

2) Approve and adopt our new 2006 Incentive Compensation Plan

For	Against	Withheld
3,447,421	223,345	136,666

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

Our common stock is traded on the Nasdaq under the symbol DEVC. The following table shows high and low closing prices for our common stock for each quarter for the last two fiscal years as quoted by Nasdaq.

2007	High Sales Price		Low Sales Price
First Quarter	$	5.89	$	3.94
2006	High Sales Price		Low Sales Price
Fourth Quarter	$	6.45	$	5.25
Third Quarter		6.80		5.46
Second Quarter		10.25		6.00
First Quarter		10.70		8.42
2005	High Sales Price		Low Sales Price
Fourth Quarter	$	11.57	$	8.85
Third Quarter		15.35		10.25
Second Quarter		14.96		10.30
First Quarter		17.49		13.55

Performance Graph

The following graph compares the performance of the Company’s common stock with the performance of the Standard & Poor’s Small Cap Index and the Nasdaq Composite Index for a five year period by measuring the changes in common stock prices from December 31, 2001 to December 31, 2006.

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We determined to discontinue use of the Dow Jones U.S. Building Materials index this year because we do not believe its inclusion reflects our business any longer given our business now substantially consists of our electronic security services division. As a result, we believe the graph as it appears below provides a more meaningful comparison of stock performance. In accordance with Securities and Exchange Commission rules, the graph included in our proxy statement for the 2006 annual meeting of our shareholders included the peer groups utilized below as well as the Dow Jones building material index as it was the first time we had utilized the S&P Small Cap 600 Diversified & Professional Services index.

	12/01		12/02		12/03		12/04		12/05		12/06
Devcon International Corp.	$	100.00	$	104.61	$	109.38	$	245.31	$	161.56	$	89.06
NASDAQ Composite Index	$	100.00	$	68.47	$	102.72	$	111.54	$	113.07	$	123.84
S&P Small Cap Index	$	100.00	$	84.68	$	116.47	$	141.61	$	151.03	$	172.29

The stock performance graph assumes for comparison that the value of our common stock and of each index was $100 on December 31, 2001 and that all dividends were reinvested. Past performance is not necessarily an indicator of future results.

As of March 30, 2007, there were 126 holders of record of the outstanding shares of common stock. The closing sales price for the common stock on March 30, 2007 was $4.90. We paid no dividends on our common stock in 2006 or 2005. The payment of cash dividends will depend upon our earnings, consolidated financial position and cash requirements, our compliance with loan agreements and other relevant factors. Management does not presently intend to pay cash dividends on our common stock. No unregistered securities were sold or issued in 2006, 2005 or 2004. In January 2007, 144,162 unregistered shares were issued as a partial payment of dividends related to our outstanding shares of Series A Convertible Preferred Stock.

Equity Compensation Plans

The table below provides information relating to our equity compensation plans as of December 31, 2006.

	Number of shares to be issued upon exercise of outstanding options	Weighted average exercise price of outstanding options		Number of shares remaining available for future issuance under compensation plans (1)
Equity compensation plans:
Approved by shareholders	657,150	$	5.25	506,000
Total	657,150	$	5.25	506,000

(1) Excluding shares reflected in first column.

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There are no options to purchase shares other than for common stock. No employment or other agreements provide for the issuance of any shares of capital stock. There are no other options, warrants, or other rights to purchase securities of the Company issued to employees and directors, other than options to purchase common stock issued under the 1986 Non-Qualified Stock Option Plan, the 1992 Directors Stock Option Plan, the 1992 Stock Option Plan, as amended, the 1999 Stock Option Plan, as amended, the 2006 Incentive Compensation Plan and the warrants issued in connection with the investment by Coconut Palm Capital Investors I, Ltd. and pursuant to the Securities Purchase Agreement entered into by us on February 10, 2006. Options to purchase 50,000 shares were issued to Matrix Desalination, Inc. at an exercise price of $6.38 in May 2003. The vesting of the options issued to Matrix was dependent on the consummation of certain investments for DevMat Utility Resources, LLC. For more information regarding the Company’s equity compensation plans, see Note 14, Stock Option Plans.

Repurchases of Company Shares

The Company terminated its share repurchase plan on November 8, 2004.

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Item 6. Selected Financial Data

The following is our selected financial data which should be read in conjunction with our consolidated financial statements and accompanying Notes and with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This data is derived from our audited consolidated financial statements.

	(Dollars in thousands) Year Ended December 31,
	2006 (as restated)			2005			2004			2003			2002
Statement of Operations Data:
Security revenue	$	53,987		$	18,515		$	943		$	—		$	—
Construction revenue		35,189			39,334			25,052			17,104			15,623
Materials revenue		15,815			13,232			15,356			13,971			11,313
Other revenue		632			701			183			—			—
Total revenue		105,623			71,782			41,534			31,075			26,936
Cost of construction		35,949			36,909			17,547			15,254			14,790
Cost of materials		14,442			12,558			12,841			12,047			10,545
Cost of security		24,627			8,044			648			—			—
Cost of other		151			407			157			—			—
Total cost of sales		75,169			57,918			31,193			27,301			25,335
Gross profit		30,454			13,864			10,341			3,774			1,601
Operating expenses		53,613			28,820			13,320			11,496			7,079
Operating (loss) income		(23,159	)		(14,956	)		(2,979	)		(7,722	)		(5,478	)
Other (expense) income		(15,058	)		(1,744	)		832			1,325			1,307
Gain on Antigua Note		1,230			804			10,970			—			—
(Loss) income from continuing operations before income taxes		(36,987	)		(15,896	)		8,823			(6,397	)		(4,171	)
Income tax (benefit) expense		(7,291	)		(504	)		1,286			(72	)		285
Net (loss) income from continuing operations	$	(29,696	)	$	(15,392	)	$	7,537		$	(6,325	)	$	(4,456	)
Income (loss) from discontinued operations		294			1,076			3,100			(2,292	)		5,657
Net (loss) income	$	(29,402	)	$	(14,316	)	$	10,637		$	(8,617	)	$	1,201
Preferred Dividends		(890	)		—			—			—			—
Accretion of Preferred Stock		(125	)		—			—			—			—
Net (loss) income available to common shareholders	$	(30,417	)	$	(14,316	)	$	10,637		$	(8,617	)	$	1,201
(Loss) income per share from continuing operations:
Basic		(4.93	)		(2.60	)		1.73			(1.89	)		(1.25	)
Diluted		(4.93	)		(2.60	)		1.48			(1.89	)		(1.25	)
(Loss) income per share from discontinued operations:
Basic		0.05			0.18			0.71			(0.68	)		1.58
Diluted		0.05			0.18			0.61			(0.68	)		1.58
Net (loss) income per share:
Basic		(4.88	)		(2.42	)		2.44			(2.57	)		0.34
Diluted		(4.88	)		(2.42	)		2.09			(2.57	)		0.34
Net (loss) income available to common stockholders per share
Basic		(5.05	)		(2.42	)		2.44			(2.57	)		0.34
Diluted		(5.05	)		(2.42	)		2.09			(2.57	)		0.34
Weighted average number of shares outstanding:
Basic		6,026			5,904			4,363			3,352			3,572
Diluted		6,026			5,904			5,097			3,352			3,572
Balance Sheet Data:
Working capital	$	7,735		$	2,560		$	42,060		$	15,839		$	19,659
Total assets	$	212,897		$	165,467		$	101,665		$	64,419		$	68,437
Long-term debt, excluding current portion	$	89,202		$	55,521		$	564		$	2,424		$	2,335
Stockholders’ equity	$	34,423		$	63,657		$	76,983		$	45,549		$	55,025

¹ Refer to Note 4, Discontinued Operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes contained in Item 8 of this report on Form 10-K. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting results of operations, financial resources, liquidity, contractual cash obligations, and critical accounting estimates.

OVERVIEW

In 2004 we embarked on a new strategy, which was to become a leading regional provider of electronic security alarm monitoring services, providing service and electronic monitoring of alarm systems to residential single and multi-family homes, financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and healthcare and educational facilities, as well as installation of electronic security alarm systems. We also have wholesale customers where we monitor security systems owned by independent security companies. Through our electronic security services division, we engage in the electronic monitoring of our installed base of security systems, as well as the installation of new monitored security systems added to our installed base, both in residential and commercial buildings.

In order to execute our new strategy, we began a process of reviewing in detail the operations of our materials and construction division, which were incurring operating losses. This strategic review and shift in operational focus resulted in a series of acquisitions and divestitures which together allowed us to pursue our objective of becoming a leading regional provider of electronic security services. The acquisitions and divestitures were as follows:

Acquisitions:

• On July 30, 2004, we acquired the issued and outstanding capital stock of SEC.

• On February 28, 2005, we acquired certain assets and assumed certain liabilities of Starpoint from Adelphia Communications.

• On November 10, 2005, we acquired the issued and outstanding capital stock of Coastal.

• On March 6, 2006, we acquired the issued and outstanding capital stock of Guardian.

Dispositions:

• On September 30, 2005, we sold our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business.

• On March 2, 2006, we sold all of the issued and outstanding common shares of AMP

• On May 2, 2006, we sold the fixed assets and substantially all of the inventory of our joint venture assets of PRCC.

• On June 27, 2006, we sold our Boca Raton-based third-party monitoring operations.

• On March 21, 2007, we sold the majority of our construction assets, construction inventory and customer lists of the construction division.

In the following management’s discussion and analysis, the net operating results of our significant dispositions noted above, except for the disposition of our third party monitoring operations and the sale of the majority of our construction assets which took place on March 21, 2007, are recorded as discontinued operations for all years presented.

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Customer account attrition has a direct impact on our results of operations since it affects our revenue, amortization expense and cash flows. We monitor attrition monthly and on a six month annualized basis. We define attrition as a ratio, the numerator of which is gross number of lost customer accounts for a given period. In our calculation we make adjustments to lost accounts for the net change, either positive or negative, for accounts greater than 90 days and re-signs and third party gains. Below is a rollforward of our RMR for the twelve months ended December 31, 2006 and 2005, respectively.

	For the Year Ended December 31,
	2006			2005
Beginning RMR Balance	$	2,471,491		$	170,967
RMR Added		298,728			87,536
Price Increase		9,827			7,201
RMR Loss (less Change of Ownership)		(343,518	)		(90,869	)
Net (Loss)/Gain		(34,963	)		3,868
Acquired Dealer RMR		17,348			26,262
Accounts Lost/Charged Back under Contract		(3,389	)		(67,621	)
Special Events:
Adelphia Acquisition		—			1,146,140
Coastal Acquisition		—			1,253,461
Sale of Buffalo Accounts		—			(61,586	)
Guardian/Mutual/Stat-Land Acquisition		1,482,931			—
Loss of Boca Pointe		(68,580	)		—
Sale of Wholesale Accounts		(345,567	)		—
Ending RMR Balance	$	3,519,271		$	2,471,491

Comparison of Year Ended December 31, 2006 with Year Ended December 31, 2005

Revenue:

	(dollars in thousands) Year Ended December 31,
	2006		2005
Security revenue	$	53,987	$	18,515
Materials revenue		15,815		13,232
Construction revenue		35,189		39,334
Other revenue		632		701
Total revenue	$	105,623	$	71,782

Electronic Security Services Division

Revenue from the electronic security services division is comprised of the monitoring and service of security systems at subscribers’ premises, billable services performed on a time and materials basis, or Services Revenue, and net installation revenue after taking into effect the requirements of SAB 104, which requires the deferral of certain revenue and related costs until services have been fulfilled. Security revenue increased by $35.4 million or 191.6% in 2006 as compared to 2005 as a result of the following:

• In March 2006, we continued to reinvest the proceeds from the sale of our materials businesses into the electronic security services business by acquiring all of the outstanding capital stock of Hollywood, Florida based Guardian. Like the Starpoint and Coastal acquisitions, this acquisition was accounted for utilizing the purchase method of accounting. Included in the 2006 revenues is approximately $19.8 million related to the results of our Guardian operations from the March 6, 2006 acquisition date.

• In November 2005, we acquired all of the outstanding capital stock of Boca Raton, Florida- based Coastal. Like the Starpoint and Guardian acquisitions, this acquisition was accounted for utilizing the purchase method of accounting. Included in the 2006 and 2005 revenues is approximately $16.4 million and $2.9 million, respectively. This reflects twelve full months in 2006 compared to approximately two months of revenues in 2005, an increase of $13.5 million.

• In February 2005, we had acquired the assets of Naples, Florida- based Starpoint. Like the Coastal and Guardian acquisitions, this acquisition was accounted for utilizing the purchase method of accounting. Included in the 2006 and 2005 revenues is approximately $14.9 million and $13.0 million, respectively. This reflects twelve full months in 2006 compared to approximately ten months of revenues in 2005, an increase of $1.9 million, which is net of approximately $1.2 million of revenue sold year over year relating to the sale of the Coastal third party monitoring business in June 2006.

• Revenue in our SEC operation in the panhandle of Florida, which was acquired in July 2004, was $2.8 million and $2.6 million in 2006 and 2005, respectively, an increase of $0.2 million.

Materials Division

Our materials division produces and distributes ready-mix concrete, crushed stone, sand, and distributes bagged cement on the Caribbean island of Sint Maarten and St. Martin. Revenues from the materials division increased by $2.6 million or 19.5% as compared to 2005 as a result of the following:

• This increase primarily occurred in the Sint Maarten operations, and was due to a large ready-mix concrete project in 2006 that started in late 2005 ($4.2 million or 1308.8% increase in revenues for this project in 2006 over 2005), the benefit of multiple price increases that started in July 2005 and continued throughout 2006, and fewer shortages of cement in 2006 compared to 2005.

• Revenues in St. Martin were positively impacted by prices increases, but these were offset by reduced operations due to the ongoing dispute with a vendor and landlord, Petit.

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Construction Division

Our construction division performed earthmoving, excavating, and filling operations, built golf courses, roads, and utility infrastructures, dredged waterways and constructed deep-water piers and marinas, primarily in the Caribbean. We have historically provided these development services to both private enterprises and government agencies. The revenue related to the work performed by our construction division is recognized on a percentage-of-completion basis. Currently, the majority of our contracts are completed in less than one year. The work is bid or negotiated at a fixed price or at a unit price where our fee is based upon the quantity of work performed and is often measured in yards, meters or tons rather than time or a time and materials basis. Revenues from the construction division decreased by $4.1 million or 10.5% as compared to 2005 as a result of the following:

• This reduction resulted primarily from difficulties in obtaining bid bonds and temporary business licenses, as a foreign corporation, in The Commonwealth of the Bahamas. In addition the division had decreased revenue relating to lower utilization of its two dredges in 2006.

• This decrease was partially offset by $3.6 million of revenues from two contracts in Antigua which were entered into in 2006.

• Our backlog of unfilled portions of construction contracts at December 31, 2006 was approximately $7.1 million, involving 14 projects, as compared to approximately $17.0 million, involving 18 projects, at December 31, 2005, due in part to the company’s bonding challenges and the Bahamian temporary business license issues.

Cost of Sales:

	(dollars in thousands) Year Ended December 31,
	2006		2005
Security	$	24,627	$	8,044
Materials		14,442		12,558
Construction		35,949		36,909
Other		151		407
Total cost of sales	$	75,169	$	57,918

Electronic Security Services Division

Included in cost of sales for the electronic security services division are the direct costs incurred to monitor and service security systems installed at subscriber premises, as well as the net direct costs incurred with the installation of new security systems. Cost of electronic security services increased in 2006 as compared to 2005 by $16.6 million or 206% as a result of the following:

• These costs rose as a result of our aforementioned acquisitions of SEC, Starpoint, Coastal and Guardian, and grew almost in direct proportion to the related sales revenue increase.

• As a percentage of security revenue, costs of security increased to 45.6% in 2006 compared to 43.4% in 2005, which was primarily attributable to the challenges of integrating our acquisitions, most of which we believe are common in nature, and principally a result of not having completed the technological integration of operating platforms. Having several operating platforms leads to inefficiencies in serving our customers and this combined with an overlap of duplicative efforts results in increased costs. We also have multiple service vehicles that need to be integrated. In 2007, we downsized personnel in our service and installation departments. We are in the process of consolidating our central office and expect the consolidation to be completed by the end of 2007.

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Materials Division

Cost of materials for continuing operations increased in 2006 as compared to 2005 by $1.9 million or 15.0% as a result of the following:

• Costs related to the aforementioned revenue growth of 19.5%.

• We also experienced increased bulk cement costs in 2006. In addition, in order to minimize potential shortages of cement that had occurred in 2005, the company began, in 2006, to purchase cement in jumbo bags, which are approximately 20% more costly than bulk cement on a per ton basis.

• We also experienced capacity problems in our ability to manufacture sand at our St. Martin quarry which resulted in the need for us to import more sand from third party producers, and thus incur higher raw material, shipping and production costs. The imported sand has certain characteristics that require an increase in the volume of sand and cement used in our ready-mix operations to meet our quality control standards. Management has implemented an alternative sourcing strategy for cement, which it believes should help in minimizing potential outages in the future and has significantly curtailed selling our internally manufactured sand to third parties, which will provide higher quality, lower cost sand to our ready-mix batch plant operations. In November 2006 our quarry operation in St. Martin were shut down in conjunction with the Petit dispute. SCGC incurred approximately $0.1 million of costs associated with temporarily shutting down the quarry operations in 2006.

Construction Division

Cost of construction for continuing operations decreased slightly in 2006 as compared to 2005 by $1.0 million or 2.6%. As a percentage of construction revenue, cost of construction increased to 102.2% in 2006 compared to 93.8% in 2005 as a result of the following:

• During the year ended December 31, 2006, our construction division reported an operating loss of $7.6 million compared to a $2.9 million operating loss for the corresponding period of 2005. This additional loss was partially attributable to significant decreases, from 2005 to 2006, in comparative gross profit recognized on specific projects. There was a $2.6 million comparative decrease in gross profit recognized on a project in the Bahamas due primarily to delays and costs associated with a non-performing subcontractor and costs associated with securing final acceptance of our underground utility work. Additionally, in 2005 we recognized $1.6 million of gross profit on dredging projects in Sint Maarten. In 2006, the dredge utilized on these projects was idle. Lastly, there was a $1.1 million comparative decrease in gross profit recognized on another project in the Bahamas due to it being substantially complete in 2005.

• Most of the construction costs are fixed and do not change in direct proportion with changes in revenue.

• In addition, the construction division continued to experience declining margins due to the completion of large dollar, higher margin projects with trailing costs, replaced by smaller, lower margin projects.

Gross Profit:

	(dollars in thousands) Year Ended December 31,
	2006			2005
Security	$	29,360		$	10,471
Materials		1,373			674
Construction		(760	)		2,425
Other		481			294
Total gross profit	$	30,454		$	13,864

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Electronic Securities Division

The gross profit of the electronic security services division has increased in 2006 as compared to 2005 by $18.9 million, or 180.4%, as a result of the following:

• Gross profit rose as a result of our aforementioned acquisitions of SEC, Starpoint, Coastal and Guardian, and grew almost in direct proportion to the related sales revenue and cost of sales increases, partially offset by the challenges of acquisition integration.

Materials Division

The gross profit of the materials division for continuing operations increased in 2006 as compared to 2005 by $0.7 million, or 103.7%, as a result of the following:

• Gross profit rose as a result of the aforementioned increase in revenue resulting from price increases and the additional revenue generated from the a large ready-mix concrete project in St. Maarten, which was partially offset by increases in cement costs.

Construction Division

The gross profit for the construction division for continuing operations decreased in 2006 as compared to 2005 by $3.2 million, or 131.2%, as a result of the following:

• Net decrease in revenues of 10.5 %.

• Increased costs to complete projects.

Operating expenses:

Total operating expenses including, selling, general and administrative, severance and retirement, and impairment of assets for 2006 increased by $24.8 million to $53.6 million compared to $28.8 million in 2005.

	(dollars in thousands)
	2006		2005
Operating expenses	$	53,613	$	28,820

Selling, general and administrative expense

Selling, general and administrative expenses (“SG&A expenses”) during 2006 increased $24.8 million, or 86.0%, to $53.6 million, compared to $28.8 million in 2005. The table below reflects the SG&A expense by division:

	(dollars in thousands) Year Ended December 31,
	2006		% of Division Revenue		2005		% of Division Revenue		$ Increase (Decrease)
Security	$	36,646	68	%	$	11,239	61	%	$	25,407
Materials		1,893	12	%		4,506	34	%		(2,613	)
Construction		3,537	10	%		4,138	11	%		(601	)
Other		132	21	%		270	39	%		(138	)
Unallocated corporate overhead		6,702				4,781				1,921
Total SG&A	$	48,910			$	24,934			$	23,976

• The $25.4 million increase in the electronic security services division SG&A expenses was primarily a result of the acquisition of the electronic security services operations of Starpoint, Coastal and Guardian, which were acquired on

46

February 28, 2005, November 10, 2005 and March 6, 2006, respectively. The results of these operations are included in the financial statements from the respective acquisition dates. Thus, 2006 has a full year of Starpoint and Coastal and approximately 10 months of expense for Guardian. As a percentage of the revenues generated by this division, the total SG&A expenses increased 7.2% to 67.9% in 2006 from 60.7% in 2005.

• Included in the 2006 security division SG&A expenses is $17.7 million of amortization, inclusive of an additional charge for amortization of customer accounts acquired by us pursuant to the various electronic security services acquisitions we completed in 2006 and 2005. This amount was $4.3 million for 2005. Customer accounts are stated at fair value based upon the discounted cash flows over the estimated life of the customer contracts and relationship and are amortized on a straight line basis over the estimated life of the customer accounts plus an additional charge for discontinued accounts. As a percentage of the revenues generated by this division, the SG&A expenses, net of amortization decreased 2.5% to 34.8% in 2006 from 37.3% in 2005. The company has not fully realized the benefits of integrating the back office operations in 2006.

• The $2.6 million decrease in the materials division is primarily the result of a reduction in the following items: corporate allocation of $1.5 million, foreign exchange benefits of $.4 million, professional fees of $.2 million and bad debt expense of $0.3 million.

• The $.6 million decrease in the construction division SG&A expenses is primarily a result of decreased wage expenses.

Severance and retirement expense

• Severance and retirement expense decreased slightly in 2006 by $0.1 million, from $0.8 million in 2005 to $0.7 million in 2005.

Impairment of assets

Impairment of assets increased in 2006 by $0.9 million, or 29.8%, as compared to $3.1 million in 2005. In accordance with SFAS 144, we performed an analysis of various construction contracts, quarry and material aggregate sites as well as our joint venture operation, DevMat. Based on this review, we determined that impairment of certain of our long lived assets had occurred and, accordingly, we recorded the following impairment charges in 2006:

	(dollars in thousands) Impairment Charge
Description of Cash Flow Unit
Construction equipment	$	389
Construction housing project – Sint Maarten		112
DevMat joint venture operations		680
Construction assets		2,788
Total 2006 Asset Impairment Charge	$	3,969

We recognized an impairment charge of $2.8 million during the fourth quarter of 2006 to write down to net realizable sales value the construction assets which were subsequently sold in March 2007. See Note 26 - Subsequent Events.

The DevMat joint venture operation consists of stationary and portable processing equipment which provides desalination and sewage treatment services. The operations are 80% owned by us. Subsequent to December 31, 2006, we drafted an agreement to sell a large contract of its DevMat joint venture operations and the assets of DevMat. This agreement is pending purchaser review and approval. In anticipation of this sale, during the fourth quarter of 2006, we recognized an additional impairment charge of $0.7 million related to this asset to write down the asset to net realizable sales value.

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For the year ended December 31, 2005, the asset impairment charges related primarily to the following:

	Impairment (dollars in thousands)
Description of Cash Flow Unit
Materials division on St. Martin	$	1,782
Construction division		1,140
DevMat joint venture operations		135
Total 2005 Asset Impairment Charge	$	3,057

Other Income (Expense):

	(dollars in thousands) Year Ended December 31,
	2006     (as restated)			2005
Other income (expense)	$	(13,828	)	$	(940	)

Other expense increased in 2006 by $12.9 million as compared to 2005 primarily as a result of the following:

• During 2006, we incurred interest expense of $21.4 million as compared to $2.6 million in 2005. The interest expense relates to the debt incurred in the financing of our electronic security services division’s acquisition of Starpoint, Coastal and Guardian. In November 2005, we entered into a $70.0 million revolving credit facility to purchase the Coastal acquisition. In March 2006, this credit facility was increased to $100.0 million to pay for a part of the purchase price of Guardian. The interest rate on the credit facility at December 31, 2006 was 11.6%.

• Interest expense was also impacted in 2006 by $10.8 million, as in March 2006, we issued to certain investors $45 million of notes with an interest rate of 8% per annum. These notes were exchanged on October 20, 2006 for shares of our Series A Convertible Preferred Stock with an aggregate liquidation value of $45 million and an adjusted dividend rate of 9.60% at December 31, 2006. Included in the $10.8 million is an $8.6 million charge to interest expense representing the accretion of the notes through the date of the exchange.

• An offset to the increase in other income (expense) is income of $4.6 million recorded in 2006 related to the change in the fair value of the warrants and the embedded conversion option in the Series A Convertible Preferred Stock. The Company, estimates the fair value of its derivatives and warrants using available market information and appropriate valuation methodologies. The fair value of the warrants and the embedded derivative are impacted by changes primarily in the price and volatility of the Company’s common stock. The company’s historic volatility of 30% and 50% was used as an estimate of the volatility expected to occur over the life of the conversion option and warrants, respectively. The volatility factor differed for these instruments as the terms differed. In addition, the Company’s stock price decreased throughout the twelve months ended December 31, 2006 by approximately 50% resulting in a reduction in the fair value of the warrants and embedded derivative. Changes in the fair value of these instruments resulted in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss is recorded in the consolidated statement of operations. The Company recognizes these derivatives as liabilities in its consolidated balance sheet, measures them at their estimated fair value and recognizes changes in their estimated fair value in their consolidated results of operations in the period of change.

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Income tax (benefit) from continuing operations:

	(dollars in thousands) Year Ended December 31,
	2006     (as restated)			2005
Income tax (benefit)	$	(7,291	)	$	(504	)

Income tax (benefit) from continuing operations increased by $6.8 million to a benefit of $7.3 million in 2006 compared to a benefit of $0.5 million in 2005 as a result of a reduction in the deferred liabilities of $6.2 million, offset by an increase in the valuation allowance against deferred tax assets of $1.4 million, and recognition of $1.2 million of foreign tax expense associated with the repatriation of earnings from our Antigua operation. The company realized the benefit of an additional deferred tax asset of $3.8 million due to the net operating loss generated by domestic operations.

Discontinued Operations:

	(dollars in thousands) Year Ended December 31,
	2006			2005
Income from discontinued operations, net of income taxes	$	(3	)	$	(1,226	)
Gain on sale from discontinued operations, net of income taxes		297			2,302
	$	294		$	1,076

As indicated earlier, our significant dispositions have been recorded as discontinued operations.

• In March 2006, we sold all of the issued and outstanding common shares of AMP Income (loss) from operations for all periods presented amounted to $1.1 million, $0.5 million and $1.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. This sale resulted in a net gain of $0.3 million.

• On May 2, 2006, we sold the fixed assets and substantially all of the inventory of our joint venture assets of PRCC. Income (loss) from operations for all periods presented amounted to ($0.3) million, ($2.0) million and ($0.2) million for the years ended December 31, 2006, 2005 and 2004, respectively. These assets were sold at their net book values, thus no gain or loss was recognized.

• In September 2005, we sold our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business. Income (loss) from operations for all periods presented amounted to ($0.6) million, $2.6 million and $1.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. This sale resulted in a net gain of $2.3 million.

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Comparison of Year Ended December 31, 2005 with Year Ended December 31, 2004

Revenue:

In 2005, our consolidated revenue amounted to $71.8 million, an increase of $30.3 million, or, approximately a 73.0% increase when compared to revenue in 2004 of $41.5 million. This revenue increase was principally due to an increase in revenue recorded by our electronic security services and construction divisions of $17.6 million and $14.3 million, respectively.

	(dollars in thousands) Year Ended December 31,
	2005		2004
Security revenue	$	18,515	$	943
Materials revenue		13,232		15,356
Construction revenue		39,334		25,052
Other revenue		701		183
Total revenue	$	71,782	$	41,534

Electronic Security Services Division

Revenue from electronic security services division increased by $17.6 million to $18.5 million in 2005 from $0.9 million in 2004. Revenue from the electronic security services division is comprised of the monitoring and service of security systems at subscribers’ premises, billable services performed on a time and materials basis, or Service Revenue, and net installation revenue after taking into effect the requirements of SAB 104, which requires the deferral of certain revenue and related costs until services have been fulfilled. The electronic security services division increase in revenue was primarily a result of the acquisition of the electronic security services operations of SEC, Starpoint and Coastal. SEC, Starpoint and Coastal were acquired on July 30, 2004, February 28, 2005 and November 10, 2005, respectively. These acquisitions were accounted for utilizing the purchase method of accounting. The results of these operations are included in the financial statements from the respective acquisition dates.

Materials Division

The materials division continuing operations revenue decreased 13.8% to $13.2 million in 2005 compared to $15.4 million in 2004. The decrease of $2.2 million on Sint Maarten/St. Martin was due to shortages of cement supply which were experienced in 2004 and continued in 2005 and which added to operational inefficiencies as well as declining sales.

Construction Division

Our construction division revenue increased by $14.3 million to $39.3 million when compared to $25.1 million in 2004, or a 57.0% increase. This increase resulted primarily from increased activity in the Bahamas and the U.S. Virgin Islands. Our backlog of unfilled portions of construction contracts at December 31, 2005 was approximately $17.0 million, involving 18 projects, as compared to approximately $18.6 million, involving 16 projects, at December 31, 2004.

Cost of Sales:

	(dollars in thousands) Year Ended December 31,
	2005		2004
Security	$	8,044	$	648
Materials		12,558		12,841
Construction		36,909		17,547
Other cost of sales		407		157
Total cost of sales	$	57,918	$	31,193

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Electronic Security Services Division

Cost of electronic security services amounted to $8.0 million or 43.4% of revenue in 2005. Included in this cost are the direct costs incurred to monitor and service security systems installed at subscriber premises, as well as the net direct costs incurred with the installation of new security systems after taking into consideration the effects of SAB 104. These costs increased as compared to 2004, are as a result of our aforementioned acquisitions of Security Equipment Company, Starpoint and Coastal.

Materials Division

Cost of materials for continuing operations as a percentage of revenue increased to 94.9% during 2005 from 83.6 % during 2004. Continued delays and shortages in cement had a negative effect on our combined operation on Sint Maarten/St. Martin. The cement supply shortage experienced in 2004 continued in 2005 and, as a consequence, our ready-mix plants were not able to produce finished products on many days throughout 2005. In addition we also experienced capacity problems in our ability to manufacture sand at our St. Martin quarry which resulted in the need for us to import more sand from third party producers, and higher raw material, shipping and production costs. The imported sand has certain characteristics that require an increase in the volume of sand used in our ready-mix operations to meet our quality control standards. Management implemented an alternative sourcing strategy for cement.

Construction Division

Cost of construction as a percentage of construction revenue increased to 93.8% during 2005 from 70.0% during 2004, or an increase of 23.8%. The increase is principally attributable to a substantial increase in the estimated costs to complete a marina project in the U.S. Virgin Islands as a result of operational difficulties. As a result of this project, the gross margin from construction operations was reduced by approximately $5.2 million during the year. The division also had overruns of approximately $1.0 million on certain projects in the Bahamas. In addition, the construction division continued to experience declining margins due to the completion of high margin projects that were being replaced by lower margin projects.

Operating expenses:

Total operating expenses including selling, general and administrative, severance and retirement, and impairment of assets for 2005 increased by $15.5 million to $28.8 million compared to $13.3 million in 2004.

	(dollars in thousands) Year Ended December 31,
	2005		2004
Operating expenses	$	28,820	$	13,320

Selling, general and administrative expense

Selling, general and administrative expenses (“SG&A expenses”) during 2005 increased $12.6 million to $24.9 million, compared to $12.3 million in 2004. The table below reflects the SG&A expense recorded by our three divisions:

	(dollars in thousands)
Division	2005		2004
Electronic security services	$	11,239	$	403
Construction		4,138		2,212
Materials		4,506		3,763
Other		270		83
Unallocated corporate overhead		4,781		5,869
Total S, G & A	$	24,934	$	12,330

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The $10.8 million increase in the electronic security services division SG&A expenses was primarily a result of the acquisitions of SEC, Starpoint and Coastal, which were acquired on July 30, 2004, February 28, 2005 and November 10, 2005, respectively. Included in the security division SG&A expenses is $4.3 million of amortization, inclusive of an additional charge for amortization of customer accounts acquired by us pursuant to the various electronic security services acquisitions we completed in 2005. Customer accounts are stated at fair value based upon the discounted cash flows over the estimated life of the customer contracts and relationship and are amortized on a straight line basis over the estimated life of the customer accounts plus an additional charge for discontinued accounts.

The $1.9 million increase in the construction division SG&A expenses is primarily a result of increased travel expenses, wages and employee benefit costs associated with managing the larger number of projects and increased revenues generated by this division in 2005, as compared to 2004.

Severance and retirement expense

Severance and retirement expense decreased in 2005 to $0.8 million from $1.0 million in 2004. The $.2 million decrease is due to the non-recurring charges associated with the separation of our former Chief Financial Officer and Executive Vice President.

Impairment of Assets

In accordance with SFAS 144, we performed an analysis of various construction contracts, quarry and material aggregate sites as well as our joint venture operation, DevMat. Based on this review we determined that impairment of certain of our long lived assets had occurred and, accordingly, we recorded the following impairment charges:

	Impairment (dollars in thousands)
Description of Cash Flow Unit
Materials division on St. Martin	$	1,782
Construction division		1,140
DevMat joint venture operations		135
Total 2005 Asset Impairment Charge	$	3,057

Operating Loss

Our operating loss from continuing operations in 2005 increased $12.0 million to $15.0 million when compared to $3.0 million in 2004. This significant decline was principally a result of our construction and materials divisions recording a combined decrease in gross profit of $6.9 million, an increase of $12.6 million in selling, general and administrative expenses and a $3.1 million charge for impairment of our assets associated with our construction and materials divisions. These items were partially offset by a $10.2 million increase in gross margin recorded by our electronic security services division.

Other Income (Expense)

Other income decreased $12.7 million to a $0.9 million expense in 2005 compared to $11.8 million income in 2004. This decrease in other income was principally due to an $11.0 million one-time gain recorded in December 2004 for the settlement of an outstanding note receivable and pending claims with the Government of Antigua and Barbuda combined with an increase in net interest expense of $2.7 million from interest expense of $1.9 million in 2005 compared to interest income of $0.8 million in 2004. The interest expense increase was principally due to new borrowings incurred to acquire the electronic security services operations of Adelphia Communications, as well as all the outstanding share capital of Coastal Security and its wholly owned subsidiaries. In addition, as a result of the repayment of the CIT facility we recorded a $1.0 million loss on early extinguishment of debt.

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Net loss from continuing operations before income taxes for 2005 was $15.9 million compared to a net income from continuing operations in 2004 of $8.8 million, or a decrease of $24.7 million.

Income tax (benefit) expense from continuing operations:

	(dollars in thousands) Year Ended December 31,
	2005			2004
Income tax (benefit) expense	$	(504	)	$	1,286

Income tax expense decreased by $1.8 million to a benefit of $0.5 million when compared to a $1.3 million expense in 2004.

Discontinued operations:

	(dollars in thousands) Year Ended December 31,
	2005			2004
Income from discontinued operations, net of income taxes	$	(1,226	)	$	3,100
Gain on sale from discontinued operations, net of income taxes		2,302			—
	$	1,076		$	3,100

As indicated earlier, our significant dispositions have been recorded as discontinued operations.

• In September 2005, we sold our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business. Income (loss) from operations for all periods presented amounted to $2.6 million and $1.7 million for the years ended December 31, 2005 and 2004, respectively. This sale resulted in a gain of $2.3 million.

• In March 2006, we sold all of the issued and outstanding common shares of AMP Income (loss) from operations for all periods presented amounted to $0.5 million and $1.5 million for the years ended December 31, 2005 and 2004, respectively.

• On May 2, 2006, we sold the fixed assets and substantially all of the inventory of our joint venture assets of PRCC. Income (loss) from operations for all periods presented amounted to ($2.0) million and ($0.2) million for the years ended December 31, 2005 and 2004, respectively.

Liquidity and Capital Resources

Adequacy of Capital Resources

We generally fund our working capital needs from operations and bank borrowings. In the electronic security services business, monitoring services are typically billed in advance on either a monthly, quarterly or annual basis. Installations of new security systems for residential customers typically result in a net investment in the customer, whereas installations of new security systems for commercial projects typically have neutral to positive cash flow. In the construction division, we have historically expended considerable funds for equipment, labor and supplies. In the construction division, our capital needs have been greatest at the start of a new contract, since we generally must complete 45 to 60 days of work before receiving the first progress payment. As a project continues, a portion of the progress billing has usually been withheld as retainage until the work is complete. Repayments by customers are due at different times within the next seven years. Accounts receivable for the materials and construction division are typically established with terms between 30 and 45 days.

Our electronic security division has days outstanding that are usually in the 30-45 day range. During the quarter ended December 31, 2006, a portion of our electronic security services customers were billed at annual amounts for services to be provided

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thus the timing of these billings drives an increase in day’s sales outstanding (DSO). At December 31, 2006 DSO was 63 days. Therefore, it is within managements expectations that the DSO at the end of the fiscal year would be higher than average. A portion of these billings are collected in the following quarter thus reducing the DSO in this segment.

Our materials division requires a continuing investment in plant and equipment, along with the related maintenance and upkeep costs. We sometimes provide long term financing to customers who have previously utilized our construction services. During 2006, 2005 and 2004, we financed $873,000, $171,000 and $532,000, respectively, of construction contracts.

As of December 31, 2006, our liquidity and capital resources included cash and cash equivalents of $5.0 million, working capital of $7.7 million and available lines of credit of $0.2 million. Total outstanding liabilities were $137.3 million as of December 31, 2006, compared to $101.8 million a year earlier. As of December 31, 2005, our liquidity and capital resources included cash and cash equivalents of $4.6 million, working capital of $2.6 million and available lines of credit of $1.4 million. Total outstanding liabilities were $101.8 million as of December 31, 2005, compared to $24.7 million a year earlier.

Cash flow used in operating activities for the year ended December 31, 2006 was $6.9 million compared with $2.0 million used in operating activities for the year ended December 31, 2005. The primary use of cash for operating activities during the year ended December 31, 2006 was a decrease in accounts payable. The primary sources of cash from operating activities was a net reduction of $1.6 million in notes receivable, a $2.1 million increase in current deferred revenue which is reflective of the increase in our securities monitoring business and a $5.1 million increase in other long-term liabilities which consists primarily of long term deferred installation revenue recognized in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). Cash flow used in operating activities for the year ended December 31, 2005 was $2.0 million compared with $12.4 million provided by operating activities for the year ended December 31, 2004. The primary use of cash for operating activities during the year ended December 31, 2005 was an increase in accounts receivable and accounts receivable - -related person of $4.2 million and an increase in prepaid and other current assets of $3.2 million. The primary source of cash from operating activities was an increase in accounts payable, accrued expenses and other liabilities of $5.4 million. For the year ended December 31, 2004, the primary source of cash from operating activities was primarily generated by net income of $10.6 million and an increase in accounts payable, accrued expenses and other liabilities of $4.4 million.

Net cash used by investing activities was $58.5 million in 2006, including $12.2 million generated from the sale of the Antiguan and Puerto Rican operations and our third party monitoring operations. We sold or disposed of land, leasehold improvements, buildings and equipment related to the sale of the Antiguan and Puerto Rican operations and our third party monitoring operations resulting in a gain of approximately $2.9 million. The net proceeds, consisting of cash and notes receivable were $9.7 million. The purchase of Guardian accounted for $66.6 million of cash usage. In addition, we purchased equipment as needed for our ongoing business operations. This resulted in a net cash expenditure of $4.1 million in 2006. In 2005, net cash used by investing activities was $89.8 million, including $10.8 million proceeds received from the sale of the V.I. operations. The purchase of Starpoint and Coastal accounted for $91.6 million of cash usage. In 2005, we had a net cash expenditure of $8.8 million related to the purchase of equipment as needed for ongoing business operations. In 2004, net cash used in investing activities was $4.7 million primarily related to $9.3 million used for the purchase of equipment for our business, $3.8 million used for the purchase of SEC, offset by $9.5 million of cash received form notes that were issued in connection with the sale of certain assets.

Net cash provided by financing activities in 2006 and 2005 was $65.8 million and $61.5 million, respectively, derived primarily from proceeds from borrowing. In 2006, we received $83.5 million from borrowings and made $13.6 million of principal repayments. In 2005, we had net borrowings of $54.0 million from our line of credit and $8.0 additional borrowings from other lenders. During the year ended December 31, 2004, net cash provided by financing activities was $17.6 million which was mostly derived from $18.2 million of proceeds received from the issuance of our stock.

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Our uses of cash over the next twelve months will be principally for working capital needs, capital expenditures and for debt service which consists primarily of estimated interest payments of $9.8 million on our outstanding senior debt. We estimate the capital expenditures will be $0.8 million related to the integration of our back office systems onto a consistent platform and the refurbishment of one of our monitoring centers and $1.1 million for our materials operation in Sint Maarten.

Cash flows from discontinued operations are included in the consolidated statement of cash flows within operating, investing and financing activities. The absence of cash flows from discontinued operations is not expected to impact future liquidity or capital resources. On the contrary we anticipate that the negative cash flows generated by our discontinued operations will eventually be reduced to zero.

We believe we can fund our planned business activities during the next twelve months with the sources of cash described above. Our plan is to continue to sell the assets related to our discontinued operations to generate cash flows coupled with the ongoing collections of our accounts receivable. We anticipate that the continued integration of the back office processes related to our acquisitions will result in reduced selling, general and administrative expenses. During 2006 and 2005, we used $66.6 million and $91.6 million, respectively, to acquire security related businesses. Over the next twelve months we are not planning nor are we obligated to make any significant investments other than normal required capital expenditures.

Debt and Other Obligations

Credit Agreement. On November 10, 2005, Devcon Security Holdings, Inc., a subsidiary of ours, or DSH entered into a Stock Purchase Agreement with the sellers of the issued and outstanding capital stock of Coastal under the terms of which DSH agreed to purchase all of the issued and outstanding capital stock of Coastal for approximately $50.8 million in cash, including transaction costs. In order to obtain the necessary funds to complete the stock purchase, DSH and Devcon Security Services Corp., a wholly-owned subsidiary of DSH, or DSS, entered into a Credit Agreement with CapitalSource, along with other lenders party to the Credit Agreement from time to time. The CapitalSource Revolving Credit Facility which replaced the $35 million senior secured revolving credit facility provided by certain lenders and CIT Financial USA, Inc., provided a three-year revolving credit facility in the maximum principal amount of $70,000,000 for the purpose of providing funds for permitted acquisitions, to refinance existing indebtedness, for the purchase and generation of alarm contracts, for the issuance of letters of credit and for other lawful purposes not prohibited by the credit agreement. The borrowers agreed to secure all of their obligations under the loan documents relating to the credit agreement by granting to the lenders a security interest in and second priority perfected lien on (1) substantially all of their existing and after-acquired personal and real property and (2) all capital stock owned by each borrower of each other borrower. In addition, Devcon International Corp. pledged to the lenders all of its capital stock of DSS. The interest rate on the outstanding obligations under the Credit Agreement is tied to the base rate plus a margin as specified therein or, at the borrowers’ option, to LIBOR plus margin amounting to 11.6%. The potential interest rate spread is base rate plus 150 to 425 basis point or LIBOR plus 325 to 575 basis points.

On March 6, 2006, we completed the acquisition of Guardian in which the Company acquired all of the outstanding capital stock of Guardian for an estimated aggregate cash purchase price of approximately $65.5 million, excluding transaction costs of $1.7 million.

In order to finance the acquisition of Guardian, we increased the amount of credit available under its CapitalSource Revolving Credit Facility from $70 million to $100 million and used $35.6 million under this facility, together with the net proceeds from the issuance of the notes and warrants, described below to purchase Guardian and repay an $8 million CapitalSource Bridge Loan. As of December 31, 2006, we had $10.9 million of unused facility under the CapitalSource Revolving Credit Facility, with zero availability.

Securities Purchase Agreement. On March 6, 2006, we issued to certain investors under the terms of a Securities Purchase Agreement, dated as of February 10, 2006, an aggregate principal amount of $45 million of notes along with warrants to acquire an aggregate of 1,650,943 shares of our common stock at an exercise price of $11.925 per share. The notes required interest at a rate equal to 8% per annum (which rate increased to 18% per annum in the event we failed to make payments required under the notes when due).

On October 20, 2006, under the terms of the Securities Purchase Agreement, the private placement investors received, in exchange for the notes, an aggregate of 45,000 shares of Series A Convertible Preferred Stock, of Devcon with a liquidation preference

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equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share for each share of Series A Convertible Preferred Stock.

The issuance of the new Series A Convertible Preferred Stock and of the Warrants could cause the issuance of greater than 20% of our outstanding shares of common stock upon the conversion of the Series A Convertible Preferred Stock and the exercise of the Warrants. The creation of a new class of preferred stock was subject to shareholder approval under Florida law, while, for various reasons related to the potential issuance of greater than 20% of our outstanding shares of common stock, the issuance of the Series A Convertible Preferred Stock required shareholder approval under the rules of Nasdaq. Holders of more than 50% of our common stock approved the foregoing. The approval became effective after the Securities and Exchange Commission rules and regulations relating to the delivery of an information statement on Schedule 14C to our shareholders was satisfied.

See “Item 1 Business–Financings” for a description of recent events concerning the Series A Convertible Preferred Stock, particularly with respect to our obligations to register the shares of our common stock underlying these securities and its potential impact on our liquidity position.

We have two key debt covenants that could affect liquidity. We believe that we will remain in compliance with both covenants in 2007:

• Debt / Performing RMR (Revolving Credit Facility & Series A Convertible Preferred Stock) – As of February 28, 2007, we had eligible Performing RMR of $3.5 million and outstanding senior debt of $89.2 million (including accrued interest) or a ratio of 25.7x. The financial covenant requires a maximum leverage ratio of 26.2x to 1.0. Our proforma leverage ratio test for the Series A Convertible Preferred Stock, which will be calculated on a net debt basis, including proforma cash from the construction sale and the $45 million face value of the Series A Convertible Preferred Stock to Performing RMR is 35.4x. Given the continued stability of our customer base and the associated Performing RMR we believe that a material decline in either is unlikely during 2007.

• Attrition rate (Revolving Credit Facility) – Our six month annualized attrition ratio as of February, 2007 was 10.8% compared to a maximum permitted ratio of 11%. Our ratio is being negatively impacted by relatively higher attrition that occurred during September and October of 2006. This higher attrition was caused by the cancellation of a number of wholesale customers whose contracts were not able to be assigned to the buyer of our wholesale business and an increase in cancellations due to a downturn in the real estate market in Florida. Our attrition rate trend over the last six months is as follows:

	Actual Period Attrition			Annualized Monthly Ratio %
	Accounts	Performing RMR
September	4,706	$	38,024	14.2	%
October	491	$	40,222	15.8	%
November	805	$	23,703	8.8	%
December	811	$	25,293	8.4	%
January	1,006	$	35,333	10.2	%
February	771	$	25,742	7.6	%

• Our minimum fixed charge coverage ratio at February 2007 was 1.16 compared to the minimum permitted ratio of 1.15.

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Related Party Notes. On June 6, 1991, we issued a promissory note in favor of Donald L. Smith, Jr., a director and former President and Chief Executive Officer of ours, in the aggregate principal amount of $2,070,000. The note provided that the balance due under the note was due on January 1, 2004, but this maturity date was extended by agreement between us and Mr. Smith to October 1, 2006. The note was unsecured and bore interest at the prime rate. The note was paid in October 2006.

Off-Balance Sheet Arrangements and Other Contractual Obligations

We have not guaranteed any other person’s or company’s debt, except as more fully described in Note 21 “Commitments and Contingencies” to our consolidated financial statements. Our short-term borrowings, long- term debt, lease commitments and other long-term obligations are more fully described in Notes 10 and 21 respectively. We have not entered into any currency or interest options, swaps or future contracts, nor do we have any off balance sheet debts or transactions.

The following table of contractual obligations includes information with respect to our known contractual obligations as of December 31, 2006.

Table of Contractual Obligations

	Payment due by period (dollars in thousands)
	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Current debt	$	12	$	12	$	—	$	—	$	—
Long-term debt obligations¹		106,735		9,847		96,888		—		—
Capital lease obligations²		144		74		70		—		—
Operating lease obligations³		12,760		2,916		4,031		2,229		3,584
Employment contracts		1,326		587		739		—		—
Preferred Stock redemption		45,000		—		15,000		30,000		—
Preferred Stock dividends		17,184		4,510		8,799		3,875		—
Total	$	183,161	$	17,946	$	125,527	$	36,104	$	3,584

¹ For purposes of this table, “Long-Term Debt Obligation” means: (i) a payment obligation (included in the Company’s consolidated financial statements) under long-term borrowings referenced in FASB Statement of Financial Accounting Standards No. 47, “Disclosure of Long-Term Obligations,” (March 1981), as may be modified or supplemented, and (ii) fixed and variable interest payment obligations related to such long-term borrowings.

² For purposes of this table, “Capital Lease Obligation” means the future minimum lease obligation plus imputed interest under a lease classified as a capital lease and disclosed pursuant to Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” (“SFAS No. 13”) (November 1976), as may be modified or supplemented. Capital lease obligations are for vehicles.

³ For purposes of this table, “Operating Lease Obligation” means a payment obligation under a lease classified as an operating lease and disclosed pursuant to SFAS No. 13, as may be modified or supplemented. Operating lease obligations are for facilities, office equipment and vehicles.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements, “Description of Business and Summary of Accounting Policies”. Certain of these policies require the application of subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and other factors that we believe to be reasonable under the circumstances.

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Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely can result in a material impact on our financial condition and operating results in the current and future periods. We periodically review the development, selection and disclosure of these critical accounting estimates. The following discussion is furnished for additional insight into certain accounting estimates that we consider to be critical. We base our estimates on historical experience and on various other factors that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Revenue and Cost Recognition

Revenue in the electronic security services division for monitoring and maintenance services is recognized monthly as services are provided pursuant to the terms of subscriber contracts, which have prices that are fixed and determinable. The Company assesses the subscriber’s ability to meet the contract terms, including meeting payment obligations, before entering into the contract. Deferred revenue results from customers who are billed for monitoring in advance of the period in which the services are provided, on a monthly, quarterly or annual basis.

The Company follows Staff Accounting Bulletin 104 (SAB 104), which requires the Company to defer certain installation revenue and expenses, primarily equipment, direct labor and direct and incremental sales commissions incurred. The capitalized costs and revenues related to the installation are then amortized over the 10 year life of an average customer relationship, on a straight line basis. If the customer being monitored is disconnected prior to the expiration of the original expected life, the unamortized portion of the deferred installation services revenue and related deferred costs are recognized in the period the disconnection becomes effective. In accordance with EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, the security service contracts that include both installation and monitoring services are considered a single unit of accounting. The criteria in EITF 00-21 that we do not meet for monitoring services and installation services to be considered separate units of accounting is that the installation service to our customers has no standalone value. The installation service alone is not functional to our customers without the monitoring service.

Revenue in the electronic security services division for installation services, for which no monitoring contract is connected, is recognized at the time the installation is completed.

Revenue and earnings on construction contracts, including construction joint ventures, are recognized on the percentage-of-completion-method based upon the ratio of costs incurred to estimated final costs, for which collectibility is reasonably assured. We recognize revenue relating to claims only when there exists a legal basis supported by objective and verifiable evidence and additional identifiable costs are incurred due to unforeseen circumstances beyond our control. Change orders resulting in incremental revenue are recognized when the change order is signed by the customer. Change orders which are deductive are recognized when the amount can be reliably estimated.

Revenue for the materials division is recognized when the products are delivered (FOB Destination), invoiced at a fixed price and the collectibility is reasonably assured.

Provisions are recognized in the statement of operations for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Contract cost is recorded as incurred and revisions in contract revenue and cost estimates are reflected in the accounting period when known. We estimate costs to complete our construction contracts based on experience from similar work in the past. If the conditions of the work to be performed change or if the estimated costs are not accurately projected, the gross profit from construction contracts may vary significantly in the future. The foregoing, as well as weather, stage of completion and mix of contracts at different margins, may cause fluctuations in gross profit between periods and these fluctuations may be significant.

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Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from management’s review and assessment of our customers’ ability to make required payments. We consider the age of specific accounts and a customer’s payment history. For our construction and materials divisions, specific collateral given by the customer to secure the receivable is obtained when we determine necessary. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances might be required.

Provision for Inventory Obsolescence

We write down inventory for estimated obsolescence or lack of marketability arising from the difference between the cost of inventory and the estimated market value based upon assessments about current and future demand and market conditions. If actual market conditions were to be less favorable than those projected by management, additional inventory reserves could be required. If the actual market demand surpasses the projected levels, inventory write downs are not reversed.

Goodwill Intangible Asset

Our goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets,” we ceased amortizing goodwill effective December 31, 2001.

Goodwill and indefinite-lived intangible assets relate to our electronic security services segment and is tested for impairment annually on June 30th and, more frequently, if a triggering event occurs utilizing a valuation study. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of the reporting unit with its carrying amount. If a reporting unit’s carrying amount exceeds its fair value, the second step is performed. The second step involves a comparison of the implied fair value and carrying value of that reporting unit’s goodwill. To the extent that a reporting unit’s carrying amount exceeds the implied fair value of its goodwill, an impairment loss is recognized. As of June 30, 2006, we were not aware of any items or events that would cause us to adjust the recorded value of goodwill for impairment. Based upon the assessment performed as of June 30, 2006, the estimated fair value of the reporting unit exceeded its carrying amount by approximately $19.7 million.

In performing this assessment, management uses the income approach and the similar transactions method of the market approach to develop the fair value of the Reporting Unit in order to assess its potential impairment of goodwill. The income approach is based on a discounted cash flow model which relies on a number of factors, including operating results, business plans, economic projections and anticipated future cash flows. Rates used to discount future cash flows are dependent upon interest rates and the cost of capital at a point in time. The similar transactions method is a market approach methodology in which the fair value of a business is estimated by analyzing the prices at which companies similar to the subject, which are used as guidelines, have sold in controlling interest transactions (mergers and acquisitions). Target companies are compared to the subject company, and multiples paid in transactions are analyzed and applied to subject company data, resulting in value indications. Comparability can be affected by, among other things, the product or service produced or sold, geographic markets served, competitive position, profitability, growth expectations, size, risk perception, and capital structure. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

As of December 31, 2006 we were not aware of any items or events that would cause us to adjust the recorded value of goodwill for impairment. Based upon the most recent assessment as of December 31, 2006, the estimated fair value of the reporting unit exceeded its carrying amount by approximately $18.1 million. Management believes the most significant assumption which would have an effect on the estimated fair value of goodwill is the long-term attrition rate after considering customer price increases, the growth rates and the discount rate. Assuming a growth rate of 8% and an attrition rate of 8%, we estimate that a one percentage point increase in these assumptions would impact the fair value of the reporting unit as follows (000s):

	Change in assumption
	1%			2%			3%
Growth Rate	$	5,464		$	11,197		$	17,206
Attrition Rate	$	(7,481	)	$	(14,480	)	$	(21,026	)
Discount Rate	$	2,148		$	(10,852	)	$	(14,465	)

The customer account growth rate, attrition rate and discount rate that were used to arrive at the fair value calculation were approximately 5.5%, (8.5%) and 13%, respectively. The projected customer account growth rate, attrition rate and discount rates that were used to arrive at the fair value calculation were approximately 10.0%, (8.0%) and 13%, respectively.

Impairment of Long-Lived Assets

We account for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS No. 144”). SFAS No. 144 requires write-downs to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.

59

Assets with a carrying value of $82.1 million held and used by us at December 31, 2006, including property, plant and equipment and amortizable intangible assets, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets to be held and used, a recoverability test is performed based on assumptions concerning the amount and timing of estimated future cash flows reflecting varying degrees of perceived risk. Impairments to long-lived assets to be disposed of are recorded based upon the fair value of the applicable assets. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated. We believe that a one percent change in any material underlying assumptions would not by itself result in the need to impair an asset.

If the long-lived assets are identified as being planned for disposal or sale, they would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. See Note 5, Impairment of Long-Lived Assets.

In 2006, we continued to evaluate and analyze our operations in accordance with SFAS No. 144. This analysis coupled with certain transactions that we entered into indicated that certain operating units were impaired. In the fourth quarter of 2006, we sold construction equipment for less than the carrying value of the equipment resulting in an impairment charge, recorded in the third quarter of 2006, of $.4 million. Subsequent to December 31, 2006, we began negotiating an agreement to sell the joint venture operations and the assets of Devmat and, in anticipation of this sale; we recorded an impairment charge of $0.7 million in the fourth quarter of 2006. In March 2007, we sold construction assets and, based on the net book value of those assets, we recorded an impairment charge of $2.8 million in the fourth quarter of 2006. The cash flow unit and impairment charge recorded in 2006 were as follows:

	(dollars in thousands)
	Impairment Charge
Construction equipment	$	389
Construction housing project – Sint Maarten		112
DevMat joint venture operations		680
Construction assets		2,788
Total 2006 Asset Impairment Charge	$	3,969

In 2005, based on continued operating losses and an undiscounted forecast of future cash flows prepared at the cash flow unit, there were a number of operations for which an impairment charge was necessary. The cash flow unit and impairment charge recorded in 2005 were as follows:

	(dollars in thousands)
	Impairment
Materials division on St. Martin	$	1,782
Construction division		1,140
DevMat joint venture operations		135
Total 2005 Asset Impairment Charge	$	3,057

Customer accounts are stated at fair value based on the discounted cash flows over the estimated life of the customer contracts and relationships. The Company uses a valuation study at the time of acquisition to determine the value and estimated life of customer accounts purchased in order to determine an appropriate method by which to amortize the acquired asset. The amortization life is based on historic analysis of customer relationships combined with estimates of expected future revenues from customer accounts.

60

The Company amortizes customer accounts on a straight-line basis over the expected life of the customer contracts, which varies from four to seventeen years, and records an additional charge equal to the remaining unamortized value of the customer account when customers discontinue service before the end of the expected life. The additional charge for discontinued accounts is equal to the remaining net book value of the customer contract and relationship for the specific customer account canceled.

Customer accounts are tested on a periodic basis or as circumstances warrant. For purposes of this impairment testing, goodwill is considered to be directly related to the acquired customer accounts. Factors we consider important that could trigger an impairment review include the following:

• high levels of customer attrition;

• continuing recurring losses above our expectations; and

• adverse regulatory rulings.

An impairment test of customer accounts would have to be performed when the undiscounted expected future operating cash flows by asset group, which consists primarily of capitalized customer accounts and related goodwill, is less than the carrying value of that asset group. An impairment would be recognized if the fair value of the customer accounts is less than the net book value of customer accounts.

Income Taxes

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the year in which the differences are expected to affect taxable income. Subsidiaries located in U.S. possessions and foreign countries file individual income tax returns. U.S. income taxes are not provided on undistributed earnings, which are expected to be permanently reinvested by foreign subsidiaries, unless the earnings can be repatriated in a tax-free or cash-flow neutral manner. In assessing the ability to realize a portion of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment. The valuation allowance for deferred tax assets as of December 31, 2006 and December 31, 2005 was $11.3 million and $9.9 million, respectively.

Contingencies

Estimated losses from contingencies are expensed if it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Gain contingencies are not reflected in the financial statements until realized. We use judgment in assessing whether a loss contingency is probable and estimable. Actual results could differ from these estimates.

Derivative Financial Instruments

We do not hold or issue derivative instruments for trading purposes. However, the SPA and Certificate of Designations governing the issuance of our Series A Convertible Preferred Stock provide for warrants and a Right to Purchase our Series A Convertible Preferred Stock that required it to be bifurcated and separately valued from the host instrument with which they relate. We recognize these derivatives as liabilities on our balance sheet and measure them at their estimated fair value, and recognize changes in their estimated fair value in earnings in the period of change. We valued the warrants and the Right to Purchase at March 6, 2006, their date of issuance, using an appropriate option pricing model (“the Model”). The Model determined an $8.6 million aggregate value for these derivatives and this value was recorded as a derivative instrument liability and classified as current or long term in accordance with respective maturity dates.

61

The following embedded derivatives were identified within the Series A Convertible Preferred Stock: i) the ability to convert the Series A Convertible Preferred Stock into common stock; ii) our option to satisfy dividends payable on the Series A Convertible Preferred Stock in common stock in lieu of cash; iii) the potential increase in the dividend rate of the Series A Convertible Preferred Stock in the event a certain level of net cash proceeds from the sale of the our construction and material division assets are not realized with in a specified time frame: and (iv) a change in control redemption right. The embedded derivatives within the Series A Convertible Preferred Stock were bifurcated and valued as a single compound derivative when the Series A Convertible Preferred Stock was issued in October 2006. We estimated that the embedded derivatives had an estimated fair value of approximately $4.5 million as of December 31, 2006. The embedded derivatives derive their value primarily based on changes in the price and volatility of our common stock and are re–valued at each balance sheet date with the resulting change in value being recorded as a charge or credit.

At December 31, 2006, we have estimated the fair value of these embedded derivatives using the following assumptions:

	Warrants		Conversion Option
Strike Price	11.925		9.54
Market Price	5.70		5.70
Volatility	45.00	%	45.00	%
Risk Free Rate	4.82	%	4.70	%
Expiration Date	3/6/2009		10/20/2012

For the year ended December 31, 2006, we recognized income of $4.6 million due to the change in the estimated fair value of the embedded derivatives. A 1% change in the volatility factor, which is one of the significant assumptions used in this valuation model, would have less than a $0.1 million impact on the results of operations.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our consolidated financial statements, the impact of a tax position if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. FIN 48 also requires expanded disclosures, including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examinations by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amount of interest and penalties recognized in the statement of operations and financial position. The provisions of FIN 48 are effective as of the beginning of the 2007 calendar year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact that the adoption of FIN 48 will have on our future results of operations and financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measures.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that the adoption of SFAS No. 157 will have on our future consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires the recognition of the funded status of a benefit plan in the balance sheet; the recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period, but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition in the current period. In addition, SFAS No. 158 amends SFAS No. 87, “Employers’ Accounting for Pensions”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, to include guidance regarding selection of assumed discount rates for use in measuring the benefit obligation. Effective December 31, 2006, we adopted the provisions of SFAS No. 158 and the adoption of SFAS No. 158 had no impact on the Company’s consolidated statement of operations for the year ended December 31, 2006.

62

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006, allowing a one-time transitional cumulative effect adjustment to beginning retained earnings as of January 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. We adopted SAB 108 in the fourth quarter of 2006 with no material impact to our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for us on January 1, 2008. We are evaluating the impact that the adoption of SFAS No. 159 will have on our future results of operations and financial position.

Related Person Transactions

We have engaged in transactions with some of our directors or employees, and other related persons. See Note 19, Related Person Transactions, to our consolidated financial statements and Item 13 of Part III.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We have not entered into any financial instruments for trading purposes. However, the estimated fair value of the derivatives embedded within our Series A Convertible Preferred Stock creates a market risk exposure resulting from changes in the price of our common stock. These embedded derivatives derive their value primarily based on the price and volatility of our common stock; however, we do not expect significant changes in the near term in the one-year historical volatility of our common stock used to calculate the estimated fair value of the embedded derivatives.

Our exposure to market risk resulting from changes in interest rates results from the variable rate of our Credit Agreement with CapitalSource. An increase in interest rates would result in lower earnings and increased cash outflow and lower borrowing capacity. The interest rate on our senior secured revolving credit facility is payable at variable rates indexed to either LIBOR or the Base Rate. The effect of each 1% increase in the LIBOR rate and the Base Rate on our senior secured revolving credit facility would result in an annual increase in interest expense of approximately $0.9 million. The revolving credit facility is currently due to be repaid by November 8, 2008. Based on repayment on that date and based on the U.S. yield curve as of December 31, 2006 and other available information, we project interest expense on our variable rate debt to increase (decrease) approximately $0.1 million and $(2.2) million for the years ended December 31, 2007 and 2008, respectively.

We have operations overseas. Generally, all significant activities of the overseas affiliates are recorded in their functional currency, which is generally the currency of the country of domicile of the affiliate. The foreign functional currencies with which we deal are Netherlands Antilles Guilders, Eastern Caribbean Units, Bahamian Dollars and Euros. The first three are pegged to the U.S. dollar and have remained fixed for many years. Management does not believe a change in the Euro exchange rate will materially affect our financial position or results of operations.

63

Item 8. Financial Statements and Supplementary Data

The financial information and the supplementary data required in response to this Item are as follows:

	Page Number(s)
Report of Independent Registered Public Accounting Firm	65
Financial Statements:
Consolidated Balance Sheets as of December 31, 2006 (as restated) and 2005	67
Consolidated Statements of Operations For Each of the Years in the Three-Year Period Ended December 31, 2006 (as restated)	69
Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income for Each of the Years in the Three-Year Period Ended December 31, 2006 (as restated)	71
Consolidated Statements of Cash Flows For Each of the Years in the Three-Year Period Ended December 31, 2006 (as restated)	72
Notes to Consolidated Financial Statements	74

64

Report of Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee, Board of Directors

and Stockholders of Devcon International Corp.

and Subsidiaries

We have audited the accompanying consolidated balance sheet of Devcon International Corp. and Subsidiaries as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive (loss) income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Devcon International Corp. and Subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, errors in the fair market valuation and accounting treatment of certain derivative liabilities, as well as the carrying value of the related Series A Convertible Preferred Stock, as of December 31, 2006, were discovered by management of the Company during the current year. Accordingly, the 2006 financial statements have been restated to correct the errors.

Berenfeld Spritzer Shechter & Sheer, LLP

Certified Public Accountants

Fort Lauderdale, Florida

April 16, 2007, except for Note 2, which is as of February 25, 2008

65

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Devcon International Corp.:

We have audited the accompanying consolidated balance sheet of Devcon International Corp. and subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive (loss) income, and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

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

/s/ KPMG LLP

April 15, 2006, except as to Note 1p, which is as of April 17, 2007

Fort Lauderdale, Florida

Certified Public Accountants

66

Consolidated Balance Sheets

December 31, 2006 and 2005

(Amounts shown in thousands except share and per share data)

	2006 (as restated)			2005
ASSETS
Current assets:
Cash and cash equivalents	$	5,015		$	4,634
Accounts receivable, net of allowance for doubtful accounts of $2,026 and $1,785, respectively		18,288			17,575
Accounts receivable, related person		506			469
Notes receivable		2,617			1,622
Notes receivable, related person		—			2,160
Costs and estimated earnings in excess of billings		1,485			2,046
Costs and estimated earnings in excess of billings, related person		—			20
Inventories		4,506			2,892
Prepaid expenses		1,501			1,464
Other current assets		6,595			4,757
Total current assets		40,513			37,639
Property, plant and equipment, net:
Land		369			304
Buildings		251			400
Leasehold improvements		1,759			1,081
Equipment		8,443			23,136
Furniture and fixtures		1,219			1,039
Construction in process		1,083			1,629
Total property, plant and equipment		13,124			27,589
Less accumulated depreciation		(1,842	)		(5,853	)
Total property, plant and equipment, net		11,282			21,736
Investments in unconsolidated joint ventures and affiliates		339			339
Notes receivable, net of current portion		1,926			3,504
Customer lists, net of amortization $16,814 and $4,407, respectively		70,788			46,050
Goodwill		76,577			48,019
Other intangible assets, net of amortization $425 and $94, respectively		2,790			1,724
Long term deferred tax asset		—			186
Other long-term assets		8,682			6,270
Total assets	$	212,897		$	165,467

See accompanying notes to the consolidated financial statements

67

Consolidated Balance Sheets (continued)

December 31, 2006 and 2005

(Amounts shown in thousands except share and per share data)

	2006 (as restated)			2005
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade and other	$	6,664		$	8,094
Accrued operational fees and taxes		2,551			2,215
Accrued expenses and other liabilities		6,618			7,169
Deferred revenue		10,413			4,808
Accrued expense, retirement and severance		671			897
Current installments of long-term debt		76			69
Current installments of long term debt, related person		—			1,725
Billings in excess of costs and estimated earnings		1,037			1,205
Billings in excess of costs and estimated earnings, related person		—			51
Derivative instruments		4,462			—
Note payable to bank		—			8,000
Income tax payable		286			846
Total current liabilities		32,778			35,079
Long-term debt, excluding current installments		89,202			55,521
Retirement and severance, excluding current portion		2,716			4,098
Long-term deferred tax liability		5,018			5,213
Other long-term liabilities, excluding current portion		7,592			1,899
Total liabilities		137,306			101,810
Commitments and contingencies (Note 21)		—			—
Series A Convertible Preferred stock, $1,000 stated value, 10,000,000 shares authorized, 45,000 shares outstanding		41,168			—
Stockholders’ equity:
Common stock, $0.10 par value. shares authorized 15,000,000, shares issued 6,033,882 in 2006 and 6,001,922 in 2005, and shares outstanding 6,033,848 in 2006 and 6,001,888 in 2005		603			600
Additional paid-in capital		31,845			31,325
Retained earnings		3,207			33,624
Accumulated other comprehensive loss – cumulative translation adjustment		(1,232	)		(1,892	)
Treasury stock, at cost, 34 shares in each of 2006 and 2005		—			—
Total stockholders’ equity		34,423			63,657
Total liabilities and stockholders’ equity	$	212,897		$	165,467

See accompanying notes to the consolidated financial statements

68

Consolidated Statements of Operations

For Each of the Years in the Three-Year Period Ended December 31, 2006

(Amounts shown in thousands except share and per share data)

	2006 (as restated)			2005			2004
Revenue
Security revenue	$	53,987		$	18,515		$	943
Materials revenue		15,815			13,232			15,356
Construction revenue		33,987			32,669			25,052
Construction revenue, related person		1,202			6,665			—
Other revenue		632			701			183
Total revenue		105,623			71,782			41,534
Cost of Sales
Cost of Security		(24,627	)		(8,044	)		(648	)
Cost of Materials		(14,442	)		(12,558	)		(12,841	)
Cost of Construction		(35,949	)		(36,909	)		(17,547	)
Cost of Other		(151	)		(407	)		(157	)
Total cost of sales		(75,169	)		(57,918	)		(31,193	)
Gross profit		30,454			13,864			10,341
Operating expenses
Selling, general and administrative		(48,910	)		(24,934	)		(12,330	)
Severance and retirement		(734	)		(829	)		(990	)
Impairment of assets		(3,969	)		(3,057	)		—
Operating loss		(23,159	)		(14,956	)		(2,979	)
Other income (expense)
Joint venture equity earnings		—			340			71
Interest expense		(21,361	)		(2,612	)		(123	)
Interest income		577			691			884
Loss on early extinguishment of debt		—			(1,008	)		—
Gain on Antigua Note		1,230			804			10,970
Derivative financial instrument benefit		4,603			—			—
Other income		1,123			845			—
(Loss) income from continuing operations before income taxes		(36,987	)		(15,896	)		8,823
Income tax (benefit) expense		(7,291	)		(504	)		1,286

69

	2006 (as restated)			2005			2004
Net (loss) income from continuing operations		$ (29,696	)		$ (15,392	)	$	7,537
(Loss) income from discontinued operations, net of income tax (benefit) expense of $0, $1,992 an $(846) in 2006, 2005 and 2004, respectively		(3)			(1,226)			3,100
Gain on sale from discontinued operations, net of income tax expense of $0, $0 and $0 for 2006, 2005 and 2004, respectively		297			2,302			—
Net (loss) income	$	(29,402	)	$	(14,316	)	$	10,637
Preferred Dividends		(890	)		—			—
Accretion of Preferred Stock		(125	)		—			—
Net (loss) income available to common stockholders	$	(30,417	)	$	(14,316	)	$	10,637
Basic (loss) income per share:
Continuing operations	$	(4.93	)	$	(2.60	)	$	1.73
Discontinued operations	$	0.05		$	.18		$	.71
Net (Loss) income	$	(4.88	)	$	(2.42	)	$	2.44
Net (loss) income available to common stockholders	$	(5.05	)	$	(2.42	)	$	2.44
Diluted (loss) income per share:
Continuing operations	$	(4.93	)	$	(2.60	)	$	1.48
Discontinued operations	$	0.05		$	.18		$	.61
Net (Loss) income	$	(4.88	)	$	(2.42	)	$	2.09
Net (loss) income available to common stockholders	$	(5.05	)	$	(2.42	)	$	2.09
Weighted average number of shares outstanding:
Basic		6,025,777			5,904,043			4,363,476
Diluted		6,025,777			5,904,043			5,096,566

See accompanying notes to the consolidated financial statements

70

Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income

For Each of the Years in the Three-Year Period Ended December 31, 2006

(Amounts shown in thousands except share and per share data)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total
Balance at December 31, 2003	$	338		$	9,209		$	37,740		$	(1,148	)	$	(590	)	$	45,549
Comprehensive income:
Net income								10,637									10,637
Currency translation adjustment		—			—			—			(242	)		—			(242	)
Comprehensive income								10,637			(242	)					10,395
Issuance of 2,000,000 shares for cash		200			17,232												17,432
Issuance of 214,356 shares for acquisition		21			2,017												2,038
Repurchase of 8,247 shares														(135	)		(135	)
Retirement of 80,703 shares		(8	)		(348	)		(271	)					627			—
Exercise of 236,231 stock options		24			1,056			—			—			—			1,080
Expense for services		—			390			—			—			—			390
Issuance of stock options					234			—			—			—			234
Balance at December 31, 2004	$	575		$	29,790		$	48,106		$	(1,390	)	$	(98	)	$	76,983
Comprehensive income:
Net (loss)		—			—			(14,316	)		—			—			(14,316	)
Currency translation adjustment		—			—			—			(502	)		—			(502	)
Comprehensive (loss)		—			—			(14,316	)		(502	)					(14,818	)
Issuance of 13,718 shares for acquisition		1			129			—			—			—			130
Repurchase of 17,300 shares		—			—			—			—			(235	)		(235	)
Retirement of 31,610 shares of treasury stock		(3	)		(164	)		(166	)		—			333			—
Exercise of 266,757 stock options		27			1,495			—			—			—			1,522
Expense for services		—			75			—			—			—			75
Balance at December 31, 2005	$	600		$	31,325		$	33,624		$	(1,892	)	$	—		$	63,657
Comprehensive income:
Net (loss)		—			—			(29,402	)		—			—			(29,402	)
Currency translation adjustment		—			—			—			660			—			660
Comprehensive (loss)		—			—			(29,402	)		660			—			(28,742	)
Exercise of 31,960 stock options		3			135			—			—			—			138
Accrued dividends on preferred stock		—			—			(890	)		—			—			(890	)
Accretion of preferred stock		—			—			(125	)		—			—			(125	)
Stock-based compensation expense		—			385			—			—			—			385
Balance at December 31, 2006 (as restated)	$	603		$	31,845		$	3,207		$	(1,232	)	$	—		$	34,423

See accompanying notes to consolidated financial statements

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Consolidated Statements of Cash Flows

For Each of the Years in the Three-Year Period Ended December 31, 2006

(Amounts shown in thousands except share and per share data)

	2006 (as restated)			2005			2004
Cash flows from operating activities:
Net (loss) income	$	(29,402	)	$	(14,316	)	$	10,637
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Gain on settlement of note receivable		—			—			(5,956	)
Non-cash stock compensation		385			75			586
Compensation expense for warrants		—			—			390
Depreciation and amortization		22,751			10,494			5,035
Deferred income tax benefit (expense)		(8,517	)		(4,007	)		1,539
Provision for doubtful accounts and notes		381			260			1,547
Impairment on long-lived assets		3,969			4,066			622
Gain on sale of property and equipment		(2,907	)		(2,651	)		(219	)
Minority interest in loss of consolidated subsidiaries		35			(57	)		1
Accretion of debt discount		8,561			—			—
Change in fair value of derivatives		(4,603	)		—			—
Loss on early extinguishment of debt		—			(883	)		—
Loan origination cost, amortization		719			100			—
Joint venture (earnings)		—			(340	)		(8	)
Changes in operating assets and liabilities:
Accounts receivable		680			(4,743	)		(723	)
Accounts receivable – related person		(37	)		578			(157	)
Notes receivable		(556	)		(1,868	)		(377	)
Notes receivable - related person		2,160			615			167
Costs and estimated earnings in excess of billings		561			(916	)		40
Costs and estimated earnings in excess of billings, related person		20			(20	)		—
Inventories		(727	)		1,598			534
Prepaid expenses & other current assets		(456	)		3,216			(2,245	)
Other long-term assets		(2,353	)		(460	)		(1,531	)
Accounts payable, accrued expenses and other liabilities		(4,010	)		5,372			4,416
Deferred revenue		2,161			584			129
Billings in excess of costs and estimated earnings		(168	)		999			(201	)
Billings in excess of costs and estimated earnings, related person		(51	)		(488	)		269
Income tax payable		(560	)		(220	)		(1,869	)
Other long-term liabilities		5,112			1,036			(177	)
Net cash (used in) provided by operating activities		(6,852	)		(1,976	)		12,449

See accompanying notes to the consolidated financial statements

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Consolidated Statements of Cash Flows (Continued)

For Each of the Years in the Three-Year Period Ended December 31, 2006

(Amounts shown in thousands except share and per share data)

	2006 (as restated)			2005			2004
Cash flows from investing activities:
Purchases of property, plant and equipment	$	(4,135	)	$	(8,833	)	$	(9,299	)
Cash paid for leasehold improvement		—			(799	)		(463	)
Cash used in business acquisitions, net of cash acquired		(66,566	)		(91,623	)		(3,848	)
Proceeds from disposition of property, plant and equipment and customer lists		2,447			10,830			209
Proceeds from disposition of business		9,733			—			—
Issuance of notes related to the sale of assets		—			—			(759	)
Payments received on notes related to the sale of assets		44			273			9,461
Investments in unconsolidated joint ventures		—			363			(5	)
Net cash used in investing activities		(58,477	)		(89,789	)		(4,704	)
Cash flows from financing activities:
Proceeds from issuance of stock		139			1,652			18,159
Purchase of stock treasury		—			(234	)		(136	)
Proceeds from debt		83,469			8,000			—
Principal payments on debt		(11,873	)		(22	)		(58	)
Principal payments on debt, related person		(1,725	)		—			(345	)
Cash paid for debt issuance cost		(4,240	)		(1,895	)		—
Net borrowing, lines of credit		—			53,970			—
Net cash provided by financing activities		65,770			61,471			17,620
Effect of exchange rate changes on cash		(60	)		—			(467	)
Net increase (decrease) in cash and cash equivalents		381			(30,294	)		24,898
Cash and cash equivalents, beginning of year		4,634			34,928			10,030
Cash and cash equivalents, end of year	$	5,015		$	4,634		$	34,928
Supplemental disclosures of cash flow information:
Cash paid for interest	$	11,114		$	1,416		$	164
Cash paid for income taxes	$	538		$	696		$	307
Supplemental non-cash items:
Non-cash reduction of note receivable	$	335		$	458		$	484
Issuance of shares for acquisition		—			130			—
Conversion of Notes into Series A Preferred Stock	$	41,043		$	—		$	—
Non-cash preferred dividend	$	890		$	—		$	—

See accompanying notes to the consolidated financial statements

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DEVCON INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD

ENDED DECEMBER 31, 2006

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Devcon International Corp. and its subsidiaries (“the Company”) provides electronic security services and products to residences, financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and health care and educational facilities. The Company also produces and distributes ready-mix concrete, crushed stone and sand and distributes bagged cement in the Caribbean. The Company also performs earthmoving, excavating and filling operations, builds golf courses, roads and utility infrastructures, dredges waterways and constructs deep-water piers and marinas in the Caribbean. On March 21, 2007, the Company completed the sale of fixed assets, inventory and customer lists constituting a majority of the assets of the Company's construction division. See Note 26, Subsequent Events, for further discussion.

(b) BASIS OF PRESENTATION

These consolidated financial statements include the accounts of Devcon International Corp. and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company’s investments in unconsolidated joint ventures and affiliates are accounted for under the equity and cost methods. Under the equity method, original investments are recorded at cost and then adjusted by the Company’s share of undistributed earnings or losses of these ventures. Other investments in unconsolidated joint ventures in which the Company owns less than 20% are accounted for using the cost method.

(c) REVENUE RECOGNITION

ELECTRONIC SECURITY SERVICES DIVISION

Revenue in the electronic security services division for monitoring and maintenance services is recognized monthly as services are provided pursuant to the terms of subscriber contracts, which have prices that are fixed and determinable. The Company assesses the subscriber’s ability to meet the contract terms, including meeting payment obligations, before entering into the contract. Deferred revenue results from customers who are billed for monitoring in advance of the period in which the services are provided, on a monthly, quarterly or annual basis.

The Company follows Staff Accounting Bulletin 104 (SAB 104), which requires the Company to defer certain installation revenue and expenses, primarily equipment, direct labor and direct and incremental sales commissions incurred. The capitalized costs and deferred revenues related to the installation are then amortized over the 10 year life of an average customer relationship, on a straight line basis. If the customer being monitored is disconnected prior to the expiration of the original expected life, the unamortized portion of the deferred installation revenue and related capitalized costs are recognized in the period the disconnection becomes effective. In accordance with EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, the security service contracts that include both installation and monitoring services are considered a single unit of accounting. The criteria in EITF 00-21 that we do not meet for monitoring services and installation services to be considered separate units of accounting is that the installation service to our customers has no standalone value. The installation service alone is not functional to our customers without the monitoring service.

Revenue in the electronic security services division for installation services, for which no monitoring contract is connected, is recognized at the time the installation is completed.

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MATERIALS DIVISION

Revenue is recognized when the products are delivered (FOB Destination), invoiced at a fixed price and the collectibility is reasonably assured.

CONSTRUCTION DIVISION

The Company uses the percentage-of-completion method of accounting for both financial statements and tax reports. Revenue is recorded based on the Company’s estimates of the completion percentage of each project, based on the cost-to-complete method. Anticipated contract losses, when probable and estimable, are charged to income. Changes in estimated contract profits are recorded in the period of change. Selling, general and administrative expenses are not allocated to contract costs. Monthly billings are based on the percentage of work completed in accordance with each specific contract. While some contracts extend longer, most are completed within one year. Revenue is recognized under the percentage-of-completion method when there is an agreement for the work, with a fixed price for the work performed or a fixed price for a quantity of work delivered, and collectibility is reasonably assured. The Company recognizes revenue relating to claims only when there exists a legal basis supported by objective and verifiable evidence and additional identifiable costs are incurred due to unforeseen circumstances beyond the Company’s control. Change orders resulting in incremental revenue are recognized when the change order is signed by the customer. Change orders which are deductive are recognized when the amount can be reliably estimated.

(d) CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash, time deposits and highly liquid debt instruments with an original maturity of three months or less.

(e) ACCOUNTS RECEIVABLE, NET

The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management.

(f) NOTES RECEIVABLE

Notes receivable are recorded at cost, less a related allowance for impaired notes receivable. Management, considering current information and events regarding the borrowers’ ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note’s effective interest rate.

(g) INVENTORIES

For the security division, inventories are primarily electronic sensors, wire and control panels (“component parts”) purchased from independent suppliers. The inventories of component parts are valued using the weighted average historical cost method to value inventory which approximates the first-in first-out cost method. If the installation of security systems will have future recurring revenue, the costs to install are deferred and included in work in process inventory. When the installation is complete, the deferred installation costs are capitalized and included in other current and long term assets accordingly. The capitalized installation costs are then amortized over the life of an average customer contract life or 10 years. If the site being monitored is disconnected prior to completion of the original expected life, the unamortized portion of the deferred installation and direct costs to acquire are expensed.

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For the construction and materials division purchased inventory, primarily cement, concrete block and sand are valued at invoice cost plus inbound freight. Manufactured aggregate and inventory values include allocable extracting, crushing, and washing costs, which includes labor, supplies, extraction royalties and quarry department direct overhead. Selling and general administrative costs are not allocated to inventory. Amounts are removed from inventory based upon average costs, which are adjusted quarterly.

(h) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.

Useful lives or lease terms for each asset type are summarized below:

Buildings	15 - 30 years
Leasehold improvements	3 - 30 years
Equipment	3 - 20 years
Furniture and fixtures	3 - 10 years

Depreciation expense was $5.0 million, $4.0 million and $2.3 million for 2006, 2005 and 2004 respectively, excluding discontinued operations.

(i) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF

The Company accounts for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS No. 144”). SFAS No. 144 requires write-downs to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.

Assets with a carrying value of $82.1 million held and used by the Company at December 31, 2006, including property, plant and equipment and amortizable intangible assets, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets to be held and used, a recoverability test is performed based on assumptions concerning the amount and timing of estimated future cash flows reflecting varying degrees of perceived risk. Impairments to long-lived assets to be disposed of are recorded based upon the fair value of the applicable assets. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated. Management believes that a one percent change in any material underlying assumptions would not by itself result in the need to impair an asset.

If the long-lived assets are identified as being planned for disposal or sale, they would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

In 2006, we continued to evaluate and analyze our operations in accordance with SFAS No. 144. This analysis, coupled with certain transactions that we entered into, indicated that certain operating units were impaired. In the fourth quarter of 2006,

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we sold construction equipment for less than the carrying value of the equipment resulting in an impairment charge, recorded in the third quarter of 2006, of $0.4 million. Subsequent to December 31, 2006, we entered into an agreement to sell the joint venture operations and the assets of DevMat and, in anticipation of this sale, we recorded an impairment charge of $0.7 million in the fourth quarter of 2006. In March 2007, we sold construction assets and, based on the net book value of those assets, we recorded an impairment charge of $2.8 million in the fourth quarter of 2006. The cash flow unit and impairment charge recorded in 2006 were as follows:

	(dollars in thousands)
Description of Cash Flow Unit	Impairment Charge
Construction equipment	$	389
Construction housing project – Sint Maarten		112
DevMat joint venture operations		680
Construction assets		2,788
Total 2006 Asset Impairment Charge	$	3,969

In 2005, based on continued operating losses and an undiscounted forecast of future cash flows prepared at the cash flow unit, there were a number of operations for which an impairment charge was necessary. The cash flow unit and impairment charge recorded in 2005 were as follows:

	(dollars in thousands)
Description of Cash Flow Unit	Impairment Charge
Materials division on St. Martin	$	1,782
Construction division		1,140
DevMat joint venture operations		135
Total 2005 Asset Impairment Charge	$	3,057

Customer accounts are stated at fair value based on the discounted cash flows over the estimated life of the customer contracts and relationships. The Company uses a valuation study at the time of acquisition to determine the value and estimated life of customer accounts purchased in order to determine an appropriate method by which to amortize the acquired asset. The amortization life is based on historic analysis of customer relationships combined with estimates of expected future revenues from customer accounts. The Company amortizes customer accounts on a straight-line basis over the expected life of the customer contracts, which varies from four to seventeen years, and records an additional charge equal to the remaining unamortized value of the customer account when customers discontinue service before the end of the expected life. The additional charge for discontinued accounts is equal to the remaining net book value of the customer contract and relationship for the specific customer account canceled.

Customer accounts are tested on a periodic basis or as circumstances warrant. Factors we consider important that could trigger an impairment review include the following:

high levels of customer attrition;

continuing recurring losses above our expectations; and

adverse regulatory rulings.

An impairment test of customer accounts would have to be performed when the undiscounted expected future operating cash flows by asset group, which consists primarily of capitalized customer accounts, is less than the carrying value of that asset group. An impairment would be recognized if the fair value of the customer accounts is less than the net book value of customer accounts.

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(j) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired businesses. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets,” we ceased amortizing goodwill effective December 31, 2001.

Goodwill and indefinite-lived intangible assets relate to the Company’s electronic security services segment and are assessed for impairment annually on June 30th and, more frequently, if a triggering event occurs utilizing a valuation study. In performing this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill impairment. Since judgment is involved in performing goodwill valuation analyses, there is a risk that the carrying value of our goodwill may be overstated or understated. As of June 30, 2006, the Company was not aware of any items or events that would cause it to adjust the recorded value of goodwill for impairment. Based upon the assessment performed as of June 30, 2006, the estimated fair value of the reporting unit exceeded its carrying amount by approximately $19.7 million.

In performing this assessment, management uses the income approach and the similar transactions method of the market approach to develop the fair value of the Reporting Unit in order to assess its potential impairment of goodwill. The income approach is based on a discounted cash flow model which relies on a number of factors, including operating results, business plans, economic projections and anticipated future cash flows. Rates used to discount future cash flows are dependent upon interest rates and the cost of capital at a point in time. The similar transactions method is a market approach methodology in which the fair value of a business is estimated by analyzing the prices at which companies similar to the subject, which are used as guidelines, have sold in controlling interest transactions (mergers and acquisitions). Target companies are compared to the subject company, and multiples paid in transactions are analyzed and applied to subject company data, resulting in value indications. Comparability can be affected by, among other things, the product or service produced or sold, geographic markets served, competitive position, profitability, growth expectations, size, risk perception, and capital structure. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

As of December 31, 2006 the Company was not aware of any items or events that would cause us to adjust the recorded value of goodwill for impairment. Based upon the most recent assessment as of December 31, 2006, the estimated fair value of the reporting unit exceeded its carrying amount by approximately $18.1 million. Management believes the most significant assumption which would have an effect on the estimated fair value of goodwill is the long-term attrition rate after considering customer price increases, the growth rates and the discount rate. Assuming a growth rate of 8% and an attrition rate of 8%, the Company estimates that a one percentage point increase in these assumptions would impact the fair value of the reporting unit as follows (000s):

	Change in assumption
	1%			2%			3%
Growth Rate	$	5,464		$	11,197		$	17,206
Attrition Rate	$	(7,481	)	$	(14,480	)	$	(21,026	)
Discount Rate	$	2,148		$	(10,852	)	$	(14,465	)

The customer account growth rate, attrition rate and discount rate that were used to arrive at the fair value calculation were approximately 5.5%, (8.5%) and 13%, respectively. The projected customer account growth rate, attrition rate and discount rates that were used to arrive at the fair value calculation were approximately 10.0%, (8.0%) and 13%, respectively.

(k) FOREIGN CURRENCY TRANSLATION

All balances denominated in foreign currencies are revalued at year-end rates to the respective functional currency of each subsidiary. For the subsidiary with a functional currency other than the U.S. dollar, assets and liabilities have been translated into U.S. dollars at year-end exchange rates. Income statement accounts are translated into U.S. dollars at average exchange rates during the period. The translation adjustment increased (decreased) equity by $660,532, $(502,610) and $(241,263) in 2006, 2005 and 2004, respectively. Gains or losses on foreign currency transactions are reflected in the net income of the period. The income (expense) recorded in selling, general & administrative expenses was $199,034, $(306,069) and $184,449 in 2006, 2005 and 2004, respectively.

The Company does not record a foreign exchange loss or gain on long-term inter-company debt for its subsidiaries. This gain or loss is deferred and combined with the translation adjustment of said subsidiary. If and when the debt is paid, in part or whole, the deferred loss or gain will be realized and will affect the result of the respective period.

(l) (LOSS) INCOME PER SHARE

The Company computes (loss) income per share in accordance with the provisions of SFAS No. 128, “Earnings per Share,” which establishes standards for computing and presenting basic and diluted income per share. Basic (loss) income per share is computed by dividing net (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted (loss) income per share is computed assuming the exercise of stock options under the treasury stock method and the related income tax effects, if not antidilutive. For loss periods, common share equivalents are excluded from the calculation, as their effect would be antidilutive. See Note 13 of the notes to the consolidated financial statements for the computation of basic and diluted number of shares.

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(m) INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company and certain of its domestic subsidiaries file consolidated federal and state income tax returns. Subsidiaries located in U.S. possessions and foreign countries file individual income tax returns. U.S. income taxes are not provided on undistributed earnings, which are expected to be permanently reinvested by foreign subsidiaries, unless the earnings can be repatriated in a tax-free or cash-flow neutral manner. The Company does not have any undistributed earnings for which a deferred tax liability has not been recognized. Under APB 23, “Accounting for Income Taxes – Special Areas”, a deferred tax liability is not recognized for any excess of financial statement carrying amount over the tax basis of an investment in the stock of a foreign subsidiary that is essentially permanent in duration since the indefinite criteria is met. A deferred tax liability is not recognized for undistributed foreign earnings that are or will be invested in a foreign entity indefinitely. In assessing the ability to realize a portion of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment. The valuation allowance for deferred tax assets as of December 31, 2006 and December 31, 2005 was $11.3 million and $9.9 million, respectively.

(n) USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.

(o) STOCK OPTION PLANS

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No.123 (revised 2004), “Share-Based Payments” (“SFAS 123R”). The Company adopted SFAS 123R using the modified prospective basis. Under this method, compensation costs recognized beginning January 1, 2006 included costs related to 1) all share-based payments granted prior to but not yet vested as of January 1, 2006, based on previously estimated grant-date fair values and 2) all share-based payments granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company has continued to use the Black-Scholes option pricing model to estimate the fair value of stock options granted subsequent to the date of adoption of SFAS 123R.

Prior to January 1, 2006, the Company applied the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.

The Company granted 299,000 stock options in 2006. The Company did not grant any options in 2005. The per share weighted-average fair value of stock options granted during 2006 and 2004 was $2.15 and $3.11, respectively, on the grant date, using the Black Scholes option-pricing model with the following assumptions:

	2006		2004
Expected dividend yield	—		—
Expected price volatility	41.3	%	27.5	%
Risk-free interest rate	5.1	%	3.6	%
Expected life of options	4.0 years		5.5 years

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During 2006, the Company determined compensation cost based on fair value at the grant date for stock options under SFAS 123R. Such compensation cost is included in the 2006 results of operations in the condensed consolidated financial statements. Had the Company determined compensation cost based on fair value at the grant date for stock options under SFAS 123 during 2005 and 2004, the Company’s net (loss) income would have been the pro forma amounts below:

	2005			2004
Net (loss) income, as reported	$	(14,316	)	$	10,637
Add total stock-based employee compensation expense included in reported net income, net of tax		75			25
Deduct total stock-based employee compensation expense determined under fair-value based method for all rewards, net of tax		(79	)		(186	)
Pro forma net (loss) income	$	(14,320	)	$	10,476
Basic (loss) income per share, as reported	$	(2.42	)	$	2.44
Basic (loss) income per share, pro forma	$	(2.43	)	$	2.40
Diluted (loss) income per share, as reported	$	(2.42	)	$	2.09
Diluted (loss) income per share, pro forma	$	(2.43	)	$	2.06

(p) RECLASSIFICATIONS

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements in order to maintain consistency and comparability between periods presented.

In September 2005, the Company sold its U.S. Virgin Islands quarries, concrete batch plant, and building products business. In March 2006, the Company sold its outstanding common shares of Antigua Masonry Products, Ltd., a subsidiary, the business of which constituted all of the Company’s materials business in Antigua and Barbuda. Finally, in May 2006, the Company sold its fixed assets and substantially the entire inventory of its joint venture assets of Puerto Rico Crushing Company. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the results of these operations have been reclassified from continuing to discontinued operations for all years presented in the accompanying Consolidated Statements of Operations, as well as Notes 4, 17, and 18 of the Notes to the Consolidated Financial Statements.

(q) LEASES

In accordance with SFAS No. 13, the Company performs a review of newly acquired leases to determine whether a lease should be treated as a capital or operating lease. Capital lease assets are capitalized and depreciated over the term of the initial lease. A liability equal to the present value of the aggregated lease payments is recorded utilizing the stated lease interest rate. If an interest rate is not stated the Company will determine an estimated cost of capital and utilize that rate to calculate the present value. If the lease has an increasing rate over time and/or is an operating lease, all leasehold incentives, rent holidays, or other incentives will be considered in determining if a deferred rent liability is required. Leasehold incentives are capitalized and depreciated over the initial term of the lease.

(r) Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its consolidated financial statements, the impact of a tax position if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. FIN 48 also requires expanded disclosures, including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a

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description of tax years that remain subject to examinations by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amount of interest and penalties recognized in the statement of operations and financial position. The provisions of FIN 48 are effective as of the beginning of the 2007 calendar year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact that the adoption of FIN 48 will have on its future results of operations and financial position.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measures.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on its future consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires the recognition of the funded status of a benefit plan in the balance sheet; the recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period, but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition in the current period. In addition, SFAS No. 158 amends SFAS No. 87, “Employers’ Accounting for Pensions”, and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, to include guidance regarding selection of assumed discount rates for use in measuring the benefit obligation. Effective December 31, 2006, the Company adopted the provisions of SFAS No. 158 and the adoption of SFAS No. 158 had no impact on its consolidated statement of operations for the year ended December 31, 2006.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006, allowing a one-time transitional cumulative effect adjustment to beginning retained earnings as of January 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. The Company adopted SAB 108 in the fourth quarter of 2006 with no material impact to its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities -- Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company on January 1, 2008. The Company evaluating the impact that the adoption of SFAS No. 159 will have on its future results of operations and financial position.

(2) RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

In connection with the Company’s review of the fair market valuation and accounting treatment of certain derivative liabilities as well as the carrying value of the related Series A Convertible Preferred Stock it was noted that the fair valuation model applied did not adequately capture and value certain features of the conversion option embedded within the Series A Convertible Preferred Stock. The substantive changes reflected in this Amendment are: (1) the re-valuation of the derivative liability 2) adjustment to the carrying value of the Series A Convertible Preferred Stock and 3) reclassification of Series A Convertible Preferred Stock dividends payable and accretion charges to net loss available to common shareholders.

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Valuation of Derivative Liability

On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of Series A Convertible Preferred Stock, par value $.10 per share, with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share. Upon the issuance of the Series A Convertible Preferred Stock, the following embedded derivatives were identified within the Series A Convertible Preferred Stock: i) the ability to convert the Preferred Stock for common stock; ii) the option of the Company to satisfy dividends payable on the Series A Convertible Preferred Stock in common stock in lieu of cash; iii) the potential increase in the dividend rate of the Preferred Stock in the event a certain level of net cash proceeds from the sale of the our construction and material division assets are not realized within a specified time frame (referred to as the legacy asset rate adjustment) and (iv) a change in control redemption right. The embedded derivatives within the Series A Convertible Preferred Stock (“Series A”) were bifurcated and valued as a single compound derivative liability at $5.8 million at the date of issuance. Upon further review it was concluded that the valuation model used did not properly address a capping feature in the conversion option. Using a binomial model it was concluded that the embedded derivatives within the Series A Convertible Preferred Stock that were bifurcated should have been valued at $0.5 million. This adjustment impacted the account balance of the derivative liability, the carrying value of the Series A Convertible Preferred Stock as well as interest expense. At December 31, 2006, the Company had originally calculated the fair value of the embedded derivative to be $8.4 million. Based on the change in the valuation model the revised fair value of the embedded derivative at December 31, 2006 was determined to be $4.5 million. The change in the fair value of the embedded derivative impacted the carrying value of the Series A Convertible Preferred Stock as shown below in the restatement tables.

Reclassification of Dividends Payable and Accretion Charges

The Series A Convertible Preferred Stock accrues dividend in accordance with the Securities Purchase Agreement.. The dividends accrued for the year ended December 31, 2006 were incorrectly charged to interest expense instead of deducted from net loss available for common stockholders in accordance with FASB Statement No. 128, Earnings per Share. The accretion of the discount on the Series A Convertible Preferred Stock was also incorrectly charged to interest expense instead of deducted from net loss available for common stockholders. In addition, issuance expenses related to preferred stock with redemption features that are not classified as liabilities in accordance with FASB Statement No. 150 Financial Instruments with Characteristics of Both Liabilities and Equity, should be deducted from such preferred stock or from additional paid-in capital arising in connection with the sale of the stock. The accretion should be charged to retained earnings (unless declared out of paid-in capital). Therefore, the amortization of the issuance costs related to the Series A Convertible Preferred Stock was reclassified from interest expense and deducted from net loss available for common stockholders.

The following sets forth the condensed consolidated balance sheet as of December 31, 2006 and the condensed consolidated statement of operations for the year ended December 31, 2006 as originally reported and as restated.

Consolidated Balance Sheet:

	Derivative Liability			Long-term Deferred Tax Liability		Series A Convertible Preferred Stock		Retained Earnings
As originally reported	$	8,390		$	4,682	$	35,873	$	4,910
Adjust the estimated fair market value of the derivative		(3,928	)		—		5,267		(1,339	)
Adjustment to true up the Discount on Series A Convertible Preferred Stock		—			—		28		(28	)
Tax effect of restatement adjustments		—			336		—		(336	)
As restated	$	4,462		$	5,018	$	41,168	$	3,207

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Consolidated Statement of Operations:

	Interest Expense			Derivative Financial Instrument Benefit			Income Tax Benefit			Net Loss			Net Loss Available to Common Shareholders
As originally reported	$	22,348		$	5,942		$	(7,627	)	$	(28,714	)	$	—
Adjust the estimated fair market value of the derivative		—			(1,339	)		—			(1,339	)		—
Reclassification of accretion of deferred issuance costs		(121	)		—			—			121			(121	)
Reclassification of dividends payable		(890	)		—			—			890			(890	)
Adjustment to true up the Discount on Series A Convertible Preferred Stock		24			—			—			(24	)		(4	)
Tax effect of restatement adjustments		—			—			336			(336	)		—
As restated	$	21,361		$	4,603		$	(7,291	)	$	(29,402	)	$	(1,015	)

(3) ACQUISITIONS

On February 28, 2005, the Company, through Devcon Security Services Corporation (“DSS”), a wholly owned subsidiary, completed the acquisition of certain net assets of Starpoint Limited’s electronic security services operation (an entity controlled by Adelphia Communications Corporation, a Delaware corporation) for approximately $40.2 million in cash, based substantially upon contractually RMR of approximately $1.15 million. The transaction was completed pursuant to the terms of an Asset Purchase Agreement, dated as of January 21, 2005 as amended (the “Asset Purchase Agreement”). Other than the Asset Purchase Agreement, there is no material relationship between the parties. The transaction received approval by the United States Bankruptcy Court for the Southern District of New York in an order issued on January 28, 2005.

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The Company utilized $24.6 million of the $35.0 million available under a Credit Facility provided by CIT, as discussed in Note 10, Debt, to satisfy a portion of the cash purchase price for the acquisition. The balance of the purchase price, including payment of $0.6 million of transaction costs, was satisfied by using cash on hand.

The acquisition was recorded using the purchase method of accounting. The purchase price allocation is based upon a valuation study as to fair value. The purchase price, adjusted for certain non-performing contracts as well as certain working capital adjustments, has been recorded pursuant to the terms of the Asset Purchase Agreement and appropriately allocated to each account set out below. Results included for the acquisition are for the period February 28, 2005 to December 31, 2006.

The purchase price allocation is as follows:

Purchase Price Allocation Starpoint	(dollars in thousands)
Accounts receivable	$	1,021
Inventory		276
Fixed Assets		313
Contractual agreements		6,460
Customer relationships		11,370
Deferred revenue		(2,192	)
Other liabilities		(487	)
Goodwill		21,904
Total Price Allocation	$	38,665

On November 10, 2005, DSH entered into a Stock Purchase Agreement with the sellers of the issued and outstanding capital stock, and certain of Sellers’ representatives, of Coastal Security Company, (“Coastal”), pursuant to which DSH agreed to purchase all of the issued and outstanding capital stock of Coastal for approximately $50.8 million in cash, including transaction costs. As more completely discussed in Note 10, Debt, to finance the acquisition, in addition to utilizing existing cash, the Company refinanced its existing senior secured revolving credit facility provided by certain lenders and CIT Financial USA, Inc, with a new $70 million Credit Agreement with CapitalSource Finance, LLC (“CapitalSource Revolving Credit Facility”).

The acquisition was recorded using the purchase method of accounting. The purchase price allocation is based upon a valuation study as to fair value. Under the purchase method of accounting, the purchase price allocation could be adjusted for up to one year based on information which, if known at the date of acquisition, would have effected the allocation. Additionally, under the terms of the Stock Purchase Agreement, there could be adjustments to the purchase price, and thereby the allocation thereof, based on a post closing review of the final balance sheet and recurring monthly monitoring revenue of Coastal.

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The purchase price allocation is as follows:

Preliminary Purchase Price Allocation Coastal	(dollars in thousands)
Cash	$	214
Accounts receivable		1,596
Inventory		890
Other current assets		164
Net fixed assets		1,002
Contractual agreements		8,700
Customer relationships		20,300
Non compete agreement		1,200
Accounts payable		(582	)
Accrued wages		(603	)
Deferred revenue		(584	)
Deferred tax liability		(3,931	)
Other liabilities		(492	)
Goodwill		22,936
Total Purchase Price Allocation	$	50,810

On March 6, 2006, the Company completed the acquisition of Guardian International, Inc. (“Guardian”) under the terms of an Agreement and Plan of Merger, dated as of November 9, 2005, between the Company, an indirect wholly-owned subsidiary of the Company and Guardian in which the Company acquired all of the outstanding capital stock of Guardian for an estimated aggregate cash purchase price of approximately $65.5 million, excluding transaction costs of $1.7 million. This purchase price consisted of (i) approximately $24.6 million paid to the holders of the common stock of Guardian, (ii) approximately $23.3 million paid to redeem two series of Guardian’s preferred stock, (iii) approximately $13.3 million used to assume and pay specified Guardian debt obligations and expenses and (iv) approximately $1.0 million used to satisfy specified expenses incurred by Guardian in connection with the merger. The balance of the purchase consideration, approximately $3.3 million, was placed in escrow. Subject to reconciliation based upon RMR and net working capital levels as of closing and subject to other possible adjustments, Guardian common shareholders received a partial pro-rata distribution from escrow in July 2006, with the balance pending resolution of certain specific income tax matters.

In order to finance the acquisition of Guardian, the Company increased the amount of cash available under its CapitalSource Revolving Credit Facility from $70 million to $100 million and used $35.6 million under this facility, together with the net proceeds from the issuance of notes and warrants, to purchase Guardian and repay the $8 million CapitalSource Bridge Loan. The Company issued to certain investors, under the terms of a Securities Purchase Agreement, dated as of February 10, 2006, an aggregate principal amount of $45 million of notes along with warrants to acquire an aggregate of 1,650,943 shares of the Company’s common stock at an exercise price of $11.925 per share. On October 20, 2006, the notes were exchanged for Series A Convertible Preferred Stock.

The Company recorded the acquisition using the purchase method of accounting. The preliminary purchase price allocation is based upon a valuation study as to fair value. Additionally, the preliminary purchase price allocation reflects adjustments since the acquisition date resulting from information subsequently obtained to complete an estimate of the fair value of the acquired assets and liabilities. Through December 31, 2006, the net effect of those adjustments was $2.9 million additional value allocated to Goodwill, primarily related to the estimated value of deferred tax liabilities. Results of operations included for the acquisition are for the period March 6, 2006 to December 31, 2006.

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The purchase price allocation is as follows:

Purchase Price Allocation Guardian	(dollars in thousands)
Cash	$	930
Accounts receivable		2,377
Inventory		1,376
Other assets		135
Net fixed assets		1,097
Customer contracts		14,000
Customer relationships		30,000
Trade name		1,400
Accounts payable and other liabilities		(3,511	)
Deferred revenue		(2,782	)
Deferred tax liability		(11,018	)
Goodwill		32,434
Total Purchase Price Allocation	$	66,438

Acquired deferred revenue results from customers who are billed for monitoring in advance of the period in which the services are provided, on a monthly, quarterly or annual basis. This deferred revenue would be recognized as monitoring and maintenance services are provided pursuant to the terms of subscriber contracts.

The following table shows the condensed consolidated results of continuing operations of the Company, SEC, Starpoint, Coastal and Guardian, as though these acquisitions had been completed at the beginning of each year being reported:

	(dollars in thousands) Twelve Months Ended December 31
	2006 (as restated)			2005			2004
Revenue	$	110,665		$	118,037		$	93,805
Net (loss) income	$	(29,442	)	$	(13,513	)	$	11,566
(Loss) income per common share – basic	$	(4.89	)	$	(2.29	)	$	2.65
(Loss) income per common share – diluted	$	(4.89	)	$	(2.29	)	$	2.27
Weighted average shares outstanding:
Basic		6,025,777			5,904,043			4,363,476
Diluted		6,025,777			5,904,043			5,096,566

(4) DISCONTINUED OPERATIONS

On September 30, 2005, the Company and its wholly owned subsidiary, V.I. Cement & Building Products, Inc. completed the sale of its U.S. Virgin Islands material operations to Heavy Materials, LLC, a U.S. Virgin Islands limited liability company and private investor group, pursuant to an Asset Purchase Agreement dated as of August 15, 2005, for $10.7 million in cash plus the issuance of a promissory note (the “Note”) to the Company in the aggregate principal amount of $2.6 million. The Note has a term of three years bearing interest at 5% per annum with interest only being paid quarterly in arrears during the first twelve months and principal and accrued interest being paid quarterly (principal being paid in eight equal quarterly installments) for the remainder of the term of the Note until the maturity date. The cash proceeds, $10.4 million net of closing costs, were received in October 2005. All quarterly payments have been received by the Company.

On March 2, 2006, the Company entered into a Stock Purchase Agreement with A. Hadeed or his nominee and Gary O’Rourke, under which the Company completed the sale of all of the issued and outstanding common shares of Antigua Masonry Products (“AMP). In connection with this sale, the purchasers acknowledged that preferred shares of AMP with a face value equal to EC

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1,436,485 (US $532,032) as of the date of the sale (collectively, the “Preferred Shares”) were outstanding and owned beneficially and of record by certain third parties and that such Preferred Shares were reflected as debt on AMP’s books and records. The purchasers further acknowledged that their acquisition of AMP was subject to the Preferred Shares and that the purchasers have sole responsibility of satisfying and discharging all obligations represented by such Preferred Shares, which represented an aggregate amount slightly in excess of $500,000. Under the terms of this Stock Purchase Agreement, the purchasers acquired 493,051 common shares of AMP for a purchase price equal to $5.1 million, subject to certain adjustments. This purchase price was paid entirely in cash. In addition, the transaction included transfers of certain assets from the Antigua operations to the Company, as well as pre-closing transfers to AMP of certain preferred shares in AMP that were owned by the Company.

On May 2, 2006, the Company sold its fixed assets and substantially all of the inventory of Puerto Rico Crushing Company (“PRCC”) in a sale agreement with Mr. Jose Criado, through a company controlled by Mr. Criado. As part of the sale, Mr. Criado assumed substantially all employee-related severance costs and liabilities arising from the lease agreement (including reclamation and leveling) for the quarry land for a purchase price of $700,000 in cash and a two-year 5% note in an amount equal to the value of inventory as of the closing date, which was $27,955.

The accompanying Consolidated Statements of Operations for all the years presented have been adjusted to classify the material operations of the U.S Virgin Islands, AMP and PRCC as discontinued operations. Selected statement of operations data for the Company’s discontinued operations is as follows:

	(dollars in thousands) Period Ending December 31,
	2006			2005			2004
Total revenue	$	3,528		$	27,106		$	27,624
Pre-tax income from discontinued operations		(3	)		766			2,254
Pre-tax gain on disposal of discontinued operations		297			2,302			—
Income before tax		294			3,068			2,254
Income tax (provision) benefit		—			(1,992	)		846
Income from discontinued operations, net of income taxes	$	294		$	1,076		$	3,100

A summary of the total assets of discontinued operations included in the accompanying consolidated balance sheet is as follows:

	(dollars in thousands) December 31, 2006
Cash	$	485
Accounts receivable, net of allowance		992
Notes receivable, net		407
Inventory		592
Other assets		438
Property and equipment, net		5,057
Total Assets	$	7,971

(5) IMPAIRMENT OF LONG LIVED ASSETS

Impairment Charges in 2006

In 2006, the Company continued to evaluate and analyze our operations in accordance with SFAS No. 144. This analysis, coupled with certain transactions that the Company entered into, indicated that certain operating units were impaired. In the fourth quarter of 2006, the Company sold construction equipment for less than the carrying value of the equipment resulting in an impairment charge,

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recorded in the third quarter of 2006, of $0.4 million. Subsequent to December 31, 2006, the Company entered into an agreement to sell the joint venture operations and the assets of DevMat and, in anticipation of this sale, the Company recorded an impairment charge of $0.7 million in the fourth quarter of 2006. In March 2007, the Company sold construction assets and, based on the net book value of those assets, the Company recorded an impairment charge of $2.8 million in the fourth quarter of 2006. See Note 26, Subsequent Events. The impairment charge recorded in 2006 was as follows:

	(dollars in thousands)
Description of Cash Flow Unit	Impairment Charge
Construction equipment	$	389
Construction housing project – Sint Maarten		112
DevMat joint venture operations		680
Construction assets		2,788
Total 2006 Asset Impairment Charge	$	3,969

Impairment Charges in 2005

An analysis of the various construction contracts, quarry and material aggregate sites, as well as the operations of the DevMat joint venture, determined that for purposes of compliance with SFAS No. 144, the Company had identifiable cash flow operating units for which an impairment analysis should be prepared. The impairment charge recorded in 2006 was as follows:

	(dollars in thousands)
Description of Cash Flow Unit	Impairment Charge
Materials division on St. Martin	$	1,782
Construction division		1,140
DevMat joint venture operations		135
Total 2005 Asset Impairment Charge	$	3,057

The quarry, aggregate and ready-mix operations on the Island of St. Martin/Sint Maarten had closely related operational management and interdependence. A discounted forecast of future operating cash flows for the St. Martin/Sint Maarten operations resulted in an impairment charge of $1.8 million. The operations have historically generated losses and breakeven to negative net cash flows after required capital expenditures to maintain the assets. The ability to generate revenues and resulting value of the assets for the St. Martin operations is largely controlled by the island economy of St. Martin/Sint Maarten. Fair market value for the long-lived assets sold individually was considered, but did not identify a value greater than the forecast of cash flows. The future depreciable life of the St. Martin/Sint Maarten assets was determined as unchanged from historic rates.

The construction operations consisted of an existing backlog of construction projects combined with a forecast of projects which were under various states of preparing bids and expected start dates. The preparation of bids, budgeting, equipment management and contract administration was performed centrally at the Company’s construction offices in Deerfield Beach, Florida. Accordingly, an appropriate amount of administrative overhead was identified and charged to the gross margin forecasted for the construction projects. After review of the forecasted discounted cash flows, an impairment charge of $1.1 million was recorded for the construction operations. The future depreciable life of the construction operation assets was determined as unchanged from historic rates.

After developing a probability forecast of the revenues and expenses of the DevMat joint venture operations, the Company determined that there was an impairment of $135,000 on DevMat’s long-lived assets. The Company further determined that the useful life expected for the long-lived assets was approximately five years from December 31, 2005 after considering a reasonable amount of capital expenditures projected to maintain the assets during the reduced useful life.

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Additionally, during the fourth quarter of 2005, the Company recorded a $1.0 million impairment charge for the Puerto Rico operations as determined by the anticipated net proceeds from sale of the PRRC operations in May 2006. These operations have been classified as discontinued operations for all periods presented. See Note 4, Discontinued Operations.

Impairment Charges in 2004

In the fourth quarter of 2004, the Company recorded an impairment charge for its materials division based upon a review of leasehold improvements on three of its quarry sites. The Company determined that the aggregate material, included within these quarry bases was no longer providing a future benefit to the Company’s extraction operations and, accordingly, a $0.6 million charge was recorded.

(6) RECEIVABLES

Accounts receivable consist of the following:

	(dollars in thousands) December 31,
	2006			2005
Materials division trade accounts	$	1,790		$	3,302
Materials division trade accounts, related person		—			—
Construction division trade accounts receivable, including retainage		6,579			7,874
Construction division trade accounts, including retainage, related person		506			469
Security division trade accounts		10,721			4,186
Due from sellers and other receivables		1,214			3,750
Due from employees		10			248
		20,820			19,829
Allowance for doubtful accounts		(2,026	)		(1,785	)
Total accounts receivable, net	$	18,794		$	18,044

	(dollars in thousands)
	2006			2005			2004
Allowance for doubtful accounts:
Beginning balance	$	1,785		$	2,785		$	2,166
Allowance charged to operations, net		1,120			320			1,547
Allowance obtained through acquisitions		222			293			40
Allowance eliminated with divestitures		(550	)		—			—
Direct write-downs charged to the allowance		(551	)		(1,613	)		(968	)
Ending balance	$	2,026		$	1,785		$	2,785
Recovery of previously written off receivables:	$	10		$	10		$	12

The construction division’s trade accounts receivable includes retention billings of $3,411,716 and $1,703,388 as of December 31, 2006 and 2005, respectively.

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Notes receivable consists of the following:

	(dollars in thousands) December 31,
	2006		2005
Unsecured promissory notes receivable with varying terms and maturity dates through 2010, (interest rates between 7.0% and 12.0%)	$	1,403	$	584
Notes receivable with varying terms and maturity dates through 2013, secured by property or equipment, (interest rates between 8% and 11%)		609		1,044
Unsecured promissory note related to customer receivable		19		—
Unsecured promissory notes receivable bearing interest at 8.0 % with varying maturity dates through 2006, guaranteed by a director of the Company and various owners of debtor, related person		—		2,160
Unsecured promissory note receivable bearing interest at 5.0% due in installments through 2008		1,971		2,631
Unsecured promissory notes receivable bearing interest at 8.0% due in 2006		—		339
Unsecured note bearing interest at 2.0 % over the prime rate, due in monthly installments through 2007 (interest rates between 7.25% and 8.15%)		541		528
Trade notes receivable	$	4,543	$	7,286

(7) INVENTORIES

Inventories consist of the following:

	(dollars in thousands) December 31,
	2006		2005
Security Services Inventory — component parts	$	1,800	$	910
Security Services Work in Process		976		390
Aggregates and Sand		890		847
Block, Cement and Material Supplies		807		530
Other		33		215
	$	4,506	$	2,892

(8) INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES AND AFFILIATES

At December 31, 2006 and 2005, the Company had investments in unconsolidated joint ventures and affiliates consisting of a 1.2 % equity interest in a real estate project in the Bahamas and a 33.3 % interest in a real estate company in Puerto Rico. See Note 19 to these Consolidated Financial Statements. At December 31, 2004, the Company had a 50% interest in a real estate project in South Florida. During 2005, the real estate project in South Florida sold the remaining property. The Company received proceeds of $368,000 and realized a gain on investment of $343,573. Equity earnings of zero, $340,000 and $71,300 were recognized in 2006, 2005, and 2004, respectively, on ventures accounted for under the equity method.

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(9) INTANGIBLE ASSETS AND GOODWILL

Intangible assets and goodwill consists of the following as of December 31, 2006 and December 31, 2005:

	(dollars in thousands)
	Goodwill			Customer Lists and Relationships			Other			Total
Ending balance, December 31, 2004	$	1,115		$	3,698		$	622		$	5,435
Acquisition of businesses		49,078			47,678			1,200			97,956
Purchase price adjustment		(1,298	)		(848	)		—			(2,146	)
Purchased from third parties		—			669			—			669
Less disposition of cancelled customer accounts		—			(1,551	)		—			(1,551	)
Less sale of customer accounts		(876	)		(955	)		—			(1,831	)
Ending balance, December 31, 2005		48,019			48,691			1,822			98,532
Less accumulated amortization		—			(2,641	)		(98	)		(2,739	)
Ending balance, net, December 31, 2005		48,019			46,050			1,724			95,793
Acquisition of businesses		32,434			44,000			1,400			77,834
Purchase price adjustment		(2,865	)								(2,865	)
Purchased from third parties					698						698
Less disposition of cancelled customer accounts					(7,040	)					(7,040	)
Less sale of customer accounts		(1,011	)		(3,331	)					(4,342	)
Ending balance, December 31, 2006		76,577			80,377			3,124			160,078
Less accumulated amortization		—			(9,589	)		(334	)		(9,923	)
	$	76,577		$	70,788		$	2,790		$	150,155

Amortization expense was $17.7 million, $4.2 million and $0.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.

The table below presents the weighted average life in years of the Company’s intangible assets.

	2006		2005		2004
	(Amount in years)
Goodwill	(a	)	(a	)	(a	)
Customer accounts	10.0		11.2		11.6
Other	2.3		3.8		4.6
Weighted average	9.9		11.0		11.3

(a) Goodwill is not amortized but, along with all other intangible assets, is reviewed for possible impairment each year at June 30 or when indicators of impairment exist.

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The table below reflects the estimated aggregate customer account amortization for each of the five succeeding years on the Company’s existing customer account base as of December 31, 2006.

	(dollars in thousands)
	2007		2008		2009		2010		2011
Aggregate amortization expense	$	14,716	$	11,773	$	9,418	$	7,539	$	6,028

(10) DEBT

Debt consists of the following:

	(dollars in thousands) December 31,
	2006		2005
Installment notes payable in monthly installments through 2008, bearing interest at a weighted average rate of 6.7% and secured by equipment with a carrying value of approximately $250,000	$	158	$	91
Secured note payable due November 9, 2008, bearing interest at the LIBOR rate plus a margin ranging from 3.25% to 5.75%		89,120		54,967
Secured note payable due March 10, 2006, bearing interest at the prime interest rate, 7.00% at December 31, 2005		—		8,000
Unsecured note payable to the Company’s former Chairman, settled in October 2006, bearing interest at the prime interest rate (7.00% at December 31, 2005)		—		1,725
Unsecured notes payable due through 2011, bearing interest at a rate of 7.0% - eliminated with divestiture of AMP		—		532
Total debt outstanding	$	89,278	$	65,315
Total current maturities on long-term debt	$	76	$	9,794
Total long-term debt excluding current maturities	$	89,202	$	55,521

On February 28, 2005, the Company, through DSS, one of its indirect wholly-owned subsidiaries, completed the acquisition of certain net assets of the electronic security services operations of Adelphia Communications Corporation, a Delaware corporation, for approximately $40.2 million in cash. DSS and its direct parent, Devcon Security Holdings, Inc. (“DSH”), a wholly-owned subsidiary of the Company, financed this acquisition through available cash on hand and a $35 million senior secured revolving credit facility provided by certain lenders and CIT Financial USA, Inc., serving as agent.

On November 10, 2005, DSH entered into a Stock Purchase Agreement with the sellers of the issued and outstanding capital stock, and certain of Sellers’ representatives, of Coastal, pursuant to which DSH agreed to purchase all of the issued and outstanding capital stock of Coastal for approximately $50.8 million in cash. In order to obtain the necessary funds to complete the stock purchase, DSH and DSS, (together the “Borrowers”), entered into a Credit Agreement with CapitalSource, (as “Agent” and “Lender”), along with other lenders party to the Credit Agreement from time to time (“Lenders”) (collectively, the “Credit Agreement”). The Credit Agreement, which replaced the CIT facility, provided a three-year revolving credit facility in the maximum principal amount of $70,000,000 for the purpose of providing funds for permitted acquisitions, to refinance existing indebtedness, for the purchase and generation of alarm contracts, for the issuance of letters of credit and for other lawful purposes not prohibited by the Credit Agreement. In connection with the replacement of the CIT facility, the Company expensed $0.9 million of unamortized debt issuance costs. The Borrowers agreed to secure all of their obligations under the loan documents relating to the Credit Agreement by granting to Agent, for the benefit of Agent and Lenders, a security interest in and second priority perfected lien on (1) substantially all of their existing and after-acquired personal and real property and (2) all capital stock owned by each Borrower of each other Borrower. In addition, the Company pledged to Agent, for the benefit of Agent and Lenders, all of its capital stock of DSS. The interest rate on the outstanding obligations under the Credit Agreement is tied to the base rate plus margin as specified therein or, at the Borrowers’ option, to LIBOR plus margin.

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Also, on November 10, 2005 and in connection with the acquisition of Coastal, the Borrowers entered into a Bridge Loan Agreement with CapitalSource Finance LLC, as lender (“CapitalSource Bridge Loan Agreement”), providing for a 120-day bridge loan in the principal amount of $8,000,000 for the purchase and generation of alarm contracts, the acquisition of Coastal, and for other lawful purposes not prohibited by the CapitalSource Bridge Loan Agreement. The Borrowers agreed to secure all of their obligations under the loan documents relating to the CapitalSource Bridge Loan Agreement by granting to CapitalSource a security interest in and first priority perfected lien upon (1) substantially all of their existing and after-acquired personal and real property, and (2) all capital stock owned by each Borrower of each other Borrower. In addition, Devcon pledged to CapitalSource all of its capital stock of DSS all of its stock in Antigua Masonry Products, Ltd., and all of its stock in Bahamas Construction and Development, Limited, as further security for the Borrowers’ obligations under the loan documents relating to the Bridge Loan Agreement. The interest rate on the outstanding obligations under the CapitalSource Bridge Loan Agreement is at the prime rate.

Also in connection with the CapitalSource Bridge Loan Agreement, the Company entered into a Guaranty with CapitalSource, dated as of November 10, 2005 (the “Guaranty”), pursuant to which the Company guaranteed the payment and performance of the Borrowers’ obligations under the Bridge Loan documents as well as all costs, expenses and liabilities that may be incurred or advanced by CapitalSource in any way in connection with the foregoing. In both the Credit Agreement and the CapitalSource Bridge Loan Agreement, the Borrowers provided Agent and Lenders (with respect to the Credit Agreement) and CapitalSource (with respect to the CapitalSource Bridge Loan Agreement) with indemnification for liabilities arising in connection with such agreements, representations and warranties, agreements and affirmative and negative covenants including financial covenants as set forth in such agreements.

The Credit Agreement and the CapitalSource Bridge Loan Agreement are cross-collateralized and cross-defaulted. Events of default under the Credit Agreement, include but are not limited to: (a) failure to make principal or interest payments when due and such default continues for three business days, and failure to make payments to Agent for reimbursable expenses within ten business days of their request, (b) any representation or warranty proves incorrect in any material respect, (c) failure to observe obligations relating to cash management, negative covenants (including regarding mergers, investments, loans, indebtedness, guaranties, liens and sale of stock and assets) and financial covenants (regarding a leverage ratio, a fixed charge coverage ratio, annual capital expenditure limitations and an attrition ratio of not greater than 11%), (d) defaults under the CapitalSource Bridge Loan Agreement, (e) a default or breach with respect to any indebtedness and certain guaranty obligations in excess of $300,000 individually or $500,000 in the aggregate, (f) certain events related to insolvency or the commencement of bankruptcy proceedings and (g) any change of control, change of management or the occurrence of any material adverse effect, as further set forth in the Credit Agreement. Upon an event of default under the Credit Agreement and the CapitalSource Bridge Loan Agreement, CapitalSource, as Agent or Bridge Loan Lender, as the case may be, may avail itself of various remedies including, without limitation, suspending or terminating existing commitments to make advances or immediately demanding payment on outstanding loans, as well as other remedies available to it under law and equity. As of December 31, 2005, the Company was in compliance with the covenants of the credit agreement and bridge loan.

On February 10, 2006, the Company issued to certain investors, under the terms of a Securities Purchase Agreement (“SPA”), an aggregate principal amount of $45 million of notes (the “Notes”) along with warrants to acquire an aggregate of 1,650,943 shares of the Company’s common stock at an exercise price of $11.925 per share. In order to finance the acquisition of Guardian which took place on March 6, 2006, the Company increased the amount of cash available under its Credit Agreement from $70 million to $100 million and used $35.6 million under this facility together with the net proceeds from the issuance of the notes and warrants to purchase Guardian and repay the $8 million CapitalSource Bridge Loan Agreement.

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The Credit Agreement contains a number of non-financial covenants imposing restrictions on the Company’s electronic security services division’s ability to, among other things, i) incur more debt, ii) pay dividends, redeem or repurchase stock or make other distributions or impair the ability of any subsidiary to make such payments to the borrower; iii) use assets as security in other transactions, iv) merge or consolidate with others or v) guarantee obligations of others. The Credit Agreement also contains financial covenants that require the Company’s subsidiaries which comprise the electronic security services division to meet a number of financial ratios and tests. Failure to comply with the obligations in the Credit Agreement could result in an event of default, which, if not cured or waived, could permit acceleration of this indebtedness or of other indebtedness, allowing senior lenders to foreclose on the Company’s electronic security services assets. In October and November 2006, the Company was not in compliance with certain financial covenants and on December 29, 2006, obtained a waiver and third amendment to the Credit Agreement that waived these breaches and amended the following provisions of the Credit Agreement; (i) increased the maximum leverage ratio from 26.0x to 1.0 to 26.6x to 1.0 (ii) reduced the minimum fixed charge coverage ratio from 1.25 to 1.0 to 1.15 to 1.0 and (iii) increased the maximum capital expenditures from $1.5 million to $1.75 million. As a result of this waiver and third amendment, at December 31, 2006, the Company was in compliance with the covenants of the Credit Agreement. (See Note 26—Subsequent Events-CapitalSource Credit Agreement.)

At December 31, 2006, the Company had $10.9 million of unused facility under the Credit Agreement and zero borrowing capacity without violating debt covenants. The effective interest on all debt outstanding, excluding lines of credit, was 11.6% at December 31, 2006 and 9.1 % at December 31, 2005.

At December 31, 2006, the Company had a $0.2 million line of credit with a bank in Sint Maarten. No amounts were outstanding under this line of credit as of December 31, 2006 or 2005.

The total maturities of all debt subsequent to December 31, 2006 are as follows:

2007	$	76
2008		89,186
2009		16
2010		—
2011		—
Thereafter		—
	$	89,278

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(11) Series A Convertible Preferred Stock

On February 10, 2006, the Company issued to certain investors, under the terms of the SPA, the Notes along with warrants to acquire an aggregate of 1,650,943 shares of the Company’s common stock at an exercise price of $11.925 per share.

On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of Series A Convertible Preferred Stock, par value $0.10 per share with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share for each share of Series A Convertible Preferred Stock.

The Series A Convertible Preferred Stock has an 8% dividend rate payable quarterly in cash or stock at the option of the Company, on April 1, July 1, October 1, and January 1. The dividend rate is subject to adjustment as defined in the SPA. The Series A Convertible Preferred Stock is convertible into the Company’s common stock at a price of $9.54 or 90% of the lowest Closing Bid Price for the last 3 trading days, if in default. The conversion price is subject to adjustment for anti-dilution transactions, as defined. Shares may be redeemed in cash if 1) the shares are not registered, 2) at maturity on or about October 20, 2012, in three equal installments payable in cash on the 4^th, 5^th and 6^th anniversary of the issuance date, 3) at the option of the holder, for cash, on May 11, 2009 or 4) at the option of the Company, for cash, on or after May 11, 2009. The Series A Convertible Preferred Stock has a mandatory conversion into Common Stock, at the option of the Company, after 2 years from date of issuance, if the common stock price exceeds 175% of the conversion price for 60 consecutive trading days.

The Series A Convertible Preferred Stock was issued at a discount of $0.5 million on October 20, 2006. The Company is amortizing the discount over the term of the Series A Convertible Preferred Stock using the effective interest rate method. At December 31, 2006, the amortization of the discount on the Series A Convertible Preferred Stock amounted to less than $.01 million and was charged to net loss available to common shareholders.

The Series A Convertible Preferred Stock is classified outside stockholder’s equity as it may be mandatorily redeemable at the option of the holder or upon the occurrence of an event that is not solely within the control of the Company. Any preferred dividends as well as the accretion of the $0.5 million discount are deducted from net income (loss) available to common shareholders. In connection with entering into the Notes, Warrants and Preferred Stock arrangements, the Company paid fees totaling $3.9 million. These fees were accounted for as deferred financing costs and are amortized on a straight line basis over 4.0 years. Through December 31, 2006, the Company amortized approximately $0.6 million of these costs. The unamortized balance of deferred financing costs at December 31, 2006 amounted to $3.3 million and are recorded as a reduction of the carrying value of the Series A Convertible Preferred Stock in the accompanying consolidated balance sheet. The Series A Preferred Stock is accreted to its liquidation value based on the effective interest method over the period to the earliest redemption date. The accretion of the deferred issuance costs was charged to retained earnings (if a deficit balance then the charge is to additional paid-in capital). For the year ended December 31, 2006, approximately $121,000 of amortization of deferred issuance costs was charged to retained earnings and deducted from net loss available to common shareholders. In addition, it was determined that the Series A Convertible Preferred Stock has several embedded derivatives that met the requirements for bifurcation at the date of issuance. (See Note 12-Derivative Instruments.)

The issuance of the Series A Convertible Preferred Stock and of the warrants could cause the issuance of greater than 20% of the Company’s outstanding shares of common stock upon the conversion of the Series A Convertible Preferred Stock and the exercise of the warrants. The creation of a new class of preferred stock was subject to shareholder approval under Florida law, while, for various reasons related to the potential issuance of greater than 20% of the Company’s outstanding shares of common stock, the issuance of the Series A Convertible Preferred Stock required shareholder approval under the rules of Nasdaq. Holders of more than 50% of the Company’s common stock approved the foregoing. The approval became effective after the Securities and Exchange Commission rules and regulations relating to the delivery of an information statement on Schedule 14C to our shareholders was satisfied.

On April 2, 2007, effective as of March 30, 2007, the Company entered into the Forbearance Agreements with certain institutional investors (the “Required Holders”) holding, in the aggregate, a majority of the Company’s previously-issued Series A Convertible Preferred Stock.

Under the terms of these Forbearance Agreements, the Required Holders have agreed that for a period of time ending no later than January 2, 2008, they shall each refrain from taking any remedial action with respect to the Company’s failure (the “Effectiveness Failure”) to have declared effective by the Securities and Exchange Commission a registration statement registering the resale of the shares of the Company’s common stock underlying the Series A Preferred Shares and warrants as required by a Registration Rights Agreement, dated February 10, 2006, by and between the Company, the Required Holders and the remaining holder of the Series A Convertible Preferred Stock (the “Registration Rights Agreement”). The parties also agreed to refrain from declaring the occurrence of any “Triggering Event” with respect to the Effectiveness Failure and from delivering any Notice of Redemption at Option of Holder with respect thereto or demanding any amounts due and payable with respect to the Effectiveness Failure, including without limitation, any Registration Delay Payments. No remedial actions were taken by the Required Holders.

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The Forbearance Agreements also contain agreements to amend the governing Certificate of Designations to revise certain terms of the Series A Convertible Preferred Stock, including, without limitation, a reduction in the conversion price of the Series A Convertible Preferred Stock to $6.75, allowance for the accrual of dividends on the Series A Convertible Preferred Stock at a rate equal to 10% per annum, which dividends may be payable in kind, and a revision of the definition of the Leverage Ratio. The revised definition shall provide for the Leverage Ratio to be calculated as a multiple of recurring monthly revenue (“Performing RMR”) as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant to require the Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30, 2008. The parties to the Forbearance Agreement also agreed to allow dividends to accrue but not be payable until the expiration of the Forbearance Period. The revised terms to the Series A Convertible Preferred Stock will become effective upon the approval of the Restated Certificate of Designations by a majority of the Company’s shareholders at the Company’s annual meeting which is scheduled to be held on June 30, 2007. At December 31, 2006, the Company accrued $0.9 million of dividends payable which is included in accrued expenses and other liabilities in the accompanying consolidated balance sheet. This amount was charged to net loss available to common shareholders for the year ended December 31, 2006.

Notwithstanding these Forbearance Agreements, on April 3, 2007, an institutional investor who holds shares of the Company’s Series A Convertible Preferred Stock, but was not a party to the Forbearance Agreements, transmitted a notice of redemption to the Company alleging the Company failed to timely pay certain Registration Delay Payments constituting a Triggering Event which gave such investor the right to require the Company to redeem all shares of Series A Convertible Preferred Stock held by such investor. The Company disagrees that this investor has such redemption right and intends to vigorously contest the actions taken by this investor to enforce such alleged right. The investor holds shares of the Company’s Series A Convertible Preferred Stock with a face value equal to $7,000,000. The Company does not believe that a liability for any registration delay payments in accordance with the Registration Rights Agreement is warranted. See Note 26 – Subsequent Events – Forbearance and Amendment Agreements.

(12) Derivative Instruments

Derivative financial instruments, such as warrants and embedded derivative instruments of a host instrument, which risk and rewards of such derivatives are not clearly and closely related to the risk and rewards of the host instrument, are generally required to be bifurcated and separately valued from the host instrument with which they relate.

The following freestanding and embedded derivative financial instruments were identified with the issuance of the Notes : i) the warrants, which is a freestanding derivative, and ii) the right to purchase the Series A Convertible Preferred Stock upon issuance (“the Right to Purchase”), which is a freestanding derivative instrument within the SPA. The Company valued the Warrants and the Right to Purchase at March 6, 2006, their date of issuance, using an appropriate option pricing model (“the Model”). The Warrants, which were issued in connection with the issuance of the Notes, are detachable and have a three-year life expiring on March 6, 2009. The Company evaluated the classification of the Warrants in accordance with Emerging Issues Task Force No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock (“EITF No. 00-19”), and concluded that the warrants do not meet the criteria under EITF 00-19 for equity classification since there is no limit as to the number of shares that will be issued in a cashless exercise and the Company is economically compelled to deliver registered shares since the maximum liquidating damages is a significant percentage of the proceeds from the issuance of the securities. The Rights to Purchase are deemed to be issued in connection with the issuance of the Notes, and have a life which expires on the date the Preferred Stock is issued. The Model determined an $8.6 million aggregate value for these derivatives and this value has been recorded as derivative instrument liability and classified as current or long term in accordance with respective maturity dates. The Model assumptions for initial valuation of the Warrants and Rights to Purchase the Preferred Stock as of the issuance date were a risk free rate of 4.77% and 4.77%, respectively, and volatility for the Company’s common stock of 50% and 30%, respectively. The volatility factors differ because of the specific terms related to the Warrants and the conversion rights. Since these derivatives are associated with the Notes, the face value of the notes were recorded net of the $8.6 million attributed to these derivative liabilities. Accordingly, the Company accreted the $8.6 million carrying value of the Notes, using the effective rate method, over the life of the Notes and recorded a non-cash charge amounting to $8.6 million to interest expense from the date of issuance through October 20, 2006, the date of exchange of the Notes into Series A Convertible Preferred Stock. Additionally, the derivative liability amounts have been re-valued at each balance sheet date with the resulting change in value being recorded as income or expense to arrive at net income. From the date of issuance through October 20, 2006, an aggregate benefit of $7.3 million has been recorded with respect to the re-valuation of these derivatives liabilities and the fair value of the Right to Purchase derivative liability was adjusted to zero at October 20, 2006 as the Right to Purchase was executed by the Note Holders. The remaining derivative liability at October 20, 2006 of $1.3 million related to the Warrants.

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On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of Series A Convertible Preferred Stock, par value $.10 per share, with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share. Upon the issuance of the Series A Convertible Preferred Stock, the following embedded derivatives were identified within the Series A Convertible Preferred Stock: i) the ability to convert the Preferred Stock for common stock; ii) the option of the Company to satisfy dividends payable on the Series A Convertible Preferred Stock in common stock in lieu of cash (dividend put option); iii) the potential increase in the dividend rate of the Preferred Stock in the event a certain level of net cash proceeds from the sale of our construction and material division assets are not realized within a specified time frame (referred to as the legacy asset rate adjustment) and (iv) a change in control redemption right. The embedded derivatives within the Series A Convertible Preferred Stock were bifurcated and valued as a single compound derivative liability at $0.5 million at the date of issuance. On April 2, 2007, the Company entered into a Forbearance Agreement with respect to the Series A Convertible Preferred Stock with some of the institutional investors, which among other amended terms eliminated the legacy rate adjustment and provided for payment of dividends in cash, therefore, at December 31, 2006, the legacy rate adjustment and the dividend put option derivatives were deemed to have zero value. The Company recorded a $3.2 million charge related to the write off of this net derivative asset.

The Model assumptions for revaluation of the Warrants and the embedded derivatives at December 31, 2006 were a risk free rate of 4.65%, and volatility for the Company’s common stock of 45%. For the year ended December 31 2006, a benefit of $0.5 million has been recorded with respect to the re-valuation of these derivatives liabilities and warrants. A total aggregate benefit of $4.6 million has been recorded with respect to the valuation of all derivatives and warrants for the year ended December 31, 2006. At December 31, 2006, the derivative liability amounted to $4.5 million, of which $3.7 million related to the conversion feature in current and long-term portions of the preferred stock and $0.8 million related to the Warrants.

The following table summarizes the activity for each derivative instrument for the year ended December 31, 2006.

	Derivative (Income) Expense			Warrants			Conversion option			Dividend put options			Legacy asset rate adjustment			Right to Purchase
Fair value of derivatives at March 6, 2007	$	—		$	(4,817,561	)	$	—		$	—		$	—		$	(3,744,434	)
Fair value adjustments prior to exchange of Notes		(7,305,683	)		3,561,249			—			—			—			3,744,434
Exchange of Notes at October 20, 2006		—			—			(3,717,016	)		3,918,602			(706,126	)		—
Fair value adjustments post exchange of Notes		2,702,587			502,294			7,595			(3,918,602	)		706,126			—
Balances at December 31, 2006 and for the twelve months then ended	$	(4,603,096	)	$	(754,018	)	$	(3,709,421	)	$	—		$	—		$	—

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(13) CAPITAL STOCK

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

Common stock:
	2006	2005		2004
Weighted average number of shares outstanding – basic	6,025,777	5,904,043		4,363,476
Effect of dilutive securities:
Options and Warrants	—	—		733,090
Weighted average number of shares outstanding – diluted	6,025,777	5,904,043		5,096,566
Options and Warrants not included above (anti-dilutive)	3,176,200	1,053,000		1,010,000
Shares outstanding:
Beginning outstanding shares	6,001,888	5,738,713		3,296,373
Repurchase of shares	—	(17,300	)	(8,247	)
Issuance of shares	31,960	280,475		2,450,587
Ending outstanding shares	6,033,848	6,001,888		5,738,713

Preferred stock:
	2006	2005	2004
Shares outstanding:
Beginning outstanding shares	—	—	—
Issuance of shares	45,000	—	—
Ending outstanding shares	45,000	—	—

(14) STOCK OPTION PLANS

The Company adopted stock option plans for officers and employees in 1986, 1992 and 1999, and amended the 1999 plan in 2003. While each plan terminates 10 years after the adoption date, issued options have their own schedule of termination. Until 1996, 2002 and 2009, options to acquire up to 300,000, 350,000, and 600,000 shares, respectively, of common stock may be granted at no less than fair market value on the date of grant.

On September 22, 2006, the Company’s board of directors adopted the Devcon International Corp. 2006 Incentive Compensation Plan (“2006 Plan”). The terms of the 2006 plan provide for grants of stock options, stock appreciation rights or SARs, restricted stock, deferred stock, other stock-related awards and performance awards that may be settled in cash, stock or other property. The purpose of the 2006 plan is to provide a means for the Company to attract key personnel to provide services to provide a means whereby those key persons can acquire and maintain stock ownership, and provide annual and long term performance incentives to expend their maximum efforts in the creation of shareholder value. The effective date of the plan coincides with the date of shareholder approval which occurred on November 10, 2006. After the effective date of the 2006 plan, no further awards may be made under the Devcon International Corp. 1999 Stock Option Plan.

Under the 2006 plan, the total number of shares of the Company’s common stock that may be subject to the granting of awards is equal to 800,000 shares, plus the number of shares with respect to which awards previously granted thereunder that terminate without being exercised, and the number of shares that are surrendered in payment of any awards or any tax withholding requirements. On November 10, 2006, 299,000 options were granted to directors, officers and employees under the 2006 plan.

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All stock options granted pursuant to the 1986 Plan not already exercisable, vest and become fully exercisable (1) on the date the optionee reaches 65 years of age and for the six-month period thereafter or as otherwise modified by the Company’s Board of Directors, (2) on the date of permanent disability of the optionee and for the six-month period thereafter, (3) on the date of a change of control and for the six-month period thereafter and (4) on the date of termination of the optionee from employment by the Company without cause and for the six-month period after termination. Stock options granted under the 1992 and 1999 Plan vest and become exercisable in varying terms and periods set by the Compensation Committee of the Board of Directors. Options issued under the 1992 and 1999 Plan expire after 10 years.

The Company adopted a stock-option plan for directors in 1992 that terminated in 2002. Options to acquire up to 50,000 shares of common stock were granted at no less than the fair-market value on the date of grant. The 1992 Directors’ Plan provided each director an initial grant of 8,000 shares and additional grants of 1,000 shares annually immediately subsequent to their reelection as a director. Stock options granted under the Directors’ Plan have 10-year terms, vest and become fully exercisable six months after the issue date. As the directors’ plan was fully granted in 2000, the directors have received their annual options since then from the employee plans.

Stock option activity by year was as follows:

	Employee Plans				Directors’ Plan
	Shares		Weighted Avg. Exercise Price		Shares		Weighted Avg. Exercise Price
Balance at December 31, 2003	782,595		$	4.07	19,000		$	5.78
Granted	174,000		$	9.85	—		$	—
Exercised	(237,231	)	$	3.25	—		$	—
Expired	(2,800	)	$	1.50	(11,000	)	$	3.17
Balance at December 31, 2004	716,564		$	5.11	8,000		$	9.38
Granted	—		$	—	—		$	—
Exercised	(266,754	)	$	5.70	—		$	—
Expired	(13,000	)	$	7.58	—		$	—
Balance at December 31, 2005	436,810		$	5.68	8,000		$	9.38
Granted	299,000		$	5.51	—		$	—
Exercised	(31,960	)	$	4.34	8,000		$	9.38
Expired	(46,700	)	$	5.97	—		$	—
Balance at December 31, 2006	657,150		$	6.10	—		$	—
Available for future grant	506,000

Weighted average information:

Price Range	Number Of Shares Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life	Number Of Shares Exercisable	Weighted Average Exercise Price
$1.50-$2.94	179,450	$	2.04	2.3	200,000	$	2.04
$5.51-$7.00	301,500		5.51	9.8	71,000		5.52
$8.01-$9.38	134,200		8.21	7.1	110,393		8.13
$12.00-$15.83	42,000		12.91	7.6	33,000		12.46
Total	657,150	$	5.59	6.9	414,393	$	5.25

As of December 31, 2006, there was approximately $496,934 of total unrecognized compensation cost related to unvested stock options granted under our stock option plan. The cost is expected to be recognized over a weighted average of 2.82 years.

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(15) WARRANT ISSUANCE

On July 30, 2004, the Company closed the transaction with Coconut Palm Capital Investors I, Ltd. (“Coconut Palm”), which the Company entered into on April 2, 2004. The transaction received shareholder approval at the annual meeting on July 30, 2004. Coconut Palm purchased from the Company 2,000,000 units for a purchase price of $9.00 per unit.

Each unit (a “Unit”) consists of (i) one share of common stock, par value $0.10 (the “Common Stock”), of the Company, (ii) a warrant to purchase one share of Common Stock at an exercise price of $10.00 per share with a term of three years, (iii) a warrant to purchase one half of one share of Common Stock at an exercise price of $11.00 per share with a term of four years and (iv) a warrant to purchase one half of one share of Common Stock at an exercise price of $15.00 per share with a term of five years. Coconut Palm distributed 50 percent of the warrants to Messrs. Rochon, Ferrari, Ruzika and others for future services to the Company. Based on the value of the warrants the Company recorded a one-time compensation expense of $390,000 in the third quarter of 2004.

Based on the number of shares that Coconut Palm purchased and the number of shares of Common Stock of the Company outstanding on July 30, 2004, Coconut Palm acquired approximately 35.3 percent of Common Stock outstanding immediately after the closing of the Purchase Agreement. Coconut Palm will also be entitled, on a fully diluted basis, to acquire up to 57.6 percent of the Common Stock of the Company outstanding upon exercise of the warrants. In addition, two individuals designated by Coconut Palm, Richard C. Rochon and Mario B. Ferrari, were elected to the Company’s board of directors.

In connection with the March 2006 issuance of $45,000,000 of term notes, the Company issued warrants to acquire an aggregate of 1,650,943 shares of common stock at an exercise price of $11.925 per share. This issuance of warrants is further discussed in Note 10, Debt, Note 11, Series A Convertible Preferred Stock and Note 12, Derivative Instruments.

(16) INCOME TAXES

Income tax (benefit) expense consists of:

	(dollars in thousands)
	Current			Deferred			Total
2006 (as restated)
Federal	$	80		$	(8,814	)	$	(8,734	)
Foreign		1,146			297			1,443
	$	1,226		$	(8,517	)	$	(7,291	)
2005
Federal	$	(1,495	)	$	(4,120	)	$	(5,615	)
Foreign		5,111			—			5,111
	$	3,616		$	(4,120	)	$	(504	)
2004
Federal	$	1,008		$	1,792		$	2,800
Foreign		(905	)		(609	)		(1,514	)
	$	103		$	1,183		$	1,286

100

The actual expense differs from the “expected” tax (benefit) expense computed by applying the U.S. federal corporate income tax rate of 34% to (loss) income before income taxes as follows:

	(dollars in thousands) December 31,
	2006 (as restated)			2005			2004
Computed “expected”
Tax (benefit) expense	$	(12,575	)	$	(5,404	)	$	3,000
Increase (reduction) in income taxes resulting from:
Repatriation of foreign income		1,625			2,890			5,270
Derivative expense associated with financial instruments		1,347			—			—
Tax incentives of foreign subsidiaries		—			(2,811	)		(3,205	)
Change in deferred tax valuation allowance		1,409			794			(1,269	)
Additional foreign taxes		1,146			5,116			(799	)
Differences in effective rate in foreign jurisdiction and other		(243	)		(1,089	)		(1,711	)
Total	$	(7,291	)	$	(504	)	$	1,286

Significant portions of the deferred tax assets and liabilities results from the tax effects of temporary difference:

	(dollars in thousands) December 31,
	2006 (as restated)			2005
Deferred tax assets:
Plant and equipment, principally due to difference in depreciation and capitalized interest	$	2,395		$	182
Net operating loss carry-forwards		13,939			7,245
Foreign tax credit		3,246			3,134
Compensation		1,572			1,614
Estimated losses on construction projects		—			506
Reserves and other		472			69
Total gross deferred tax assets	$	21,624		$	12,750
Less valuation allowance		(11,284	)		(9,875	)
Net deferred tax assets	$	10,340		$	2,875
Deferred tax liabilities:
Intangible assets, principally due to purchase valuation of customer lists	$	(12,295	)	$	(6,206	)
Estimated losses on construction projects		(10	)		—
Total gross deferred tax liabilities	$	(12,305	)	$	(6,206	)
Net deferred tax	$	(1,965	)	$	(3,331	)

In assessing the ability to realize a portion of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making the assessment. Taxable temporary differences giving rise to deferred tax liabilities will reverse in the same period and jurisdiction and are of the same character as the temporary differences giving rise to the deferred tax assets net of valuation allowances. The valuation allowance for deferred tax assets as of December 31, 2006 and December 31, 2005 was $11.3 million and $9.9 million, respectively. The increase (decrease) in valuation allowance was $1.4 million and $1.3 million in 2006 and 2005, respectively. The increase in valuation allowance primarily consisted of the addition of a $0.6 million valuation on the foreign tax credit created from the withholding taxes deemed paid and an increase of $1.5 million in valuation allowance due to a net increase in 2006 foreign and state net operating losses. These increases were offset in part by a reduction in the valuation allowance due to a reduction in prior year foreign net operating loss carry forward and change in state tax rates due to the acquisition (discussed below).

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We determined that for the calendar year ended December 31, 2006, the utilization of the deferred tax assets is premised on the recognition of the deferred liabilities created primarily by the acquisitions of the Guardian and Coastal business in the same periods. The expected realizability of deferred tax assets may also be achieved based on income generated from continuing domestic operations.

During 2005, the Company repatriated $20.4 million of previously un-remitted earnings from Antigua, of which $5.1 million was withheld for Antiguan withholding taxes, which were deemed paid by utilization of a portion of the $7.5 million tax credit received as part of an agreement with the Antiguan Government. During 2006, the Company distributed an additional $4.6 millions of earnings before the sale of the material division subsidiaries in Antigua, using another $1.2 million of the withholding tax credits.

At December 31, 2006, the Company had accumulated net operating loss carry-forwards available to offset future taxable income in its Caribbean operations of about $20.4 million, which expire at various times through the year 2012. All tax loss carry forwards at December 31, 2006, consisted of net operating losses expiring from 2007 to 2012.

At December 31, 2006, the Company had accumulated net operating loss carry-forwards available to offset future taxable incomes of $11.1 million and a $50.3 million for Federal and State, respectively.

During 2005, the Company’s subsidiary, Virgin Islands Cement & Building Products, Inc. sold its materials business for $13.3 million. The net impact on the deferred asset was a reduction of the asset by $1.0 million. The tax on income from discontinued operations including the gain was $1.7 million. This was partially offset by a loss in continuing operations.

In November 2005, the Company acquired Coastal for $50.8 million in a stock purchase. In conjunction with the identification and valuation of finite lived assets under FAS 141, an additional deferred liability of $3.9 million was established through the purchase accounting.

In March 2006, the Company sold all of the issued and outstanding common shares of AMP, a subsidiary, the business of which constituted all of the Company’s materials business in Antigua and Barbuda, for a purchase price equal to $5.1 million in cash, subject to specified adjustments. The tax on income from discontinued operations including the gain was $0.0 million and $0.3 million for 2006 and 2005, respectively.

In March 2006, the Company acquired Guardian for $65.5 million in cash. In conjunction with the identification and valuation of finite lived assets under FAS 141, an additional net deferred liability of $11.0 million was established through the purchase accounting.

In May 2006, the Company sold all of the fixed assets and substantially all of the inventory of its joint venture assets of PRCC, for a purchase price of $700,000 cash and a two-year 5% note for $27,955, the value of the inventory as of the closing date. The net impact on the deferred asset was zero.

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(17) FOREIGN SUBSIDIARIES

Combined financial information for the Company’s foreign Caribbean subsidiaries, except for those located in the U.S. Virgin Islands and Puerto Rico, are summarized as follows:

	(dollars in thousands) December 31,
	2006			2005
Current assets	$	13,347		$	14,645
Advances (from) to the Company		(12,144	)		292
Property, plant and equipment, net		6,448			14,897
Investments in joint ventures and affiliates, net		523			123
Notes receivable		1,112			4,078
Other assets		842			1,353
Total assets	$	10,128		$	35,388
Current liabilities	$	3,686		$	6,077
Long-term liabilities		1,421			3,304
Equity		5,021			26,007
Total liabilities and equity	$	10,128		$	35,388

	(dollars in thousands) December 31,
	2006			2005		2004
Revenue	$	40,555		$	49,708	$	32,299
Income before income taxes		(4,535	)		2,262		14,097
Net income		(4,535	)		2,254		13,491

(18) SEGMENT REPORTING

The Company is organized based on the products and services it provides. Under this organizational structure the Company has three reportable divisions: electronic security services, materials and construction. The electronic security services division provides installation, monitoring and service of electronic security systems for commercial and residential customers. The construction division consists of land development and marine construction projects. The materials division includes manufacturing and distribution of ready-mix concrete, concrete block, crushed aggregate and cement. The accounting policies of the segments are those described in Note 1, Summary of Significant Accounting Policies.

	(dollars in thousands) December 31,
	2006			2005			2004
Revenue (including inter-segment):
Security	$	53,987		$	18,515		$	943
Material		15,815			13,410			15,870
Construction		35,970			39,776			25,672
Other		632			862			184
Elimination of inter-segment revenue		(781	)		(781	)		(1,135	)
Total	$	105,623		$	71,782		$	41,534

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	(dollars in thousands) December 31,
	2006 (as restated)			2005			2004
Interest Expense:
Security	$	(9,933	)	$	(2,455	)	$	—
Material		—			(3	)		(9	)
Construction		—			(3	)		(22	)
Other		(11,428	)		(151	)		(92	)
Total	$	(21,361	)	$	(2,612	)	$	(123	)
Operating (loss):
Security	$	(7,349	)	$	(771	)	$	(108	)
Material		(520	)		(5,613	)		(2,987	)
Construction		(7,644	)		(2,916	)		4,593
Other		(332	)		(111	)		(56	)
Unallocated corporate overhead		(7,314	)		(5,545	)		(4,421	)
Total	$	(23,159	)	$	(14,956	)	$	(2,979	)
Other income, net		7,533			1,672			11,925
(Loss) income from continuing operations before income taxes	$	(36,987	)	$	(15,896	)	$	8,823
Total Assets:
Security	$	182,092		$	114,483
Material		5,626			14,544
Construction		21,985			30,861
Other		3,194			5,579
Total		212,897		$	165,467
Depreciation and amortization:
Security	$	18,846		$	4,498		$	244
Material		722			1,175			581
Construction		2,449			2,281			1,635
Discontinued		50			2,280			2,530
Other		684			260			45
Total	$	22,751		$	10,494		$	5,035
	(dollars in thousands) December 31,
	2006			2005			2004
Capital expenditures:
Security	$	1,635		$	346		$	7
Material		621			2,216			3,163
Construction		1,637			5,698			5,208
Other		203			1,373			1,384
Total	$	4,096		$	9,633		$	9,762

Operating loss is revenue less operating expenses. In computing operating loss, the following items have not been added or deducted: interest expense, income tax expense, equity in earnings from unconsolidated joint ventures and affiliates, interest and other income and minority interest.

Additionally, the Company recorded a $1.0 million loss on debt extinguished by the electronic security services division in 2005 as a result of refinancing the CIT facility.

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Revenue by geographic area includes sales to unaffiliated customers based on customer location, not the selling entity’s location. The Company moves its equipment from country to country; therefore, to make this disclosure meaningful the geographic area separation for assets is based on the location of the legal entity owning the assets. One customer, the owner of one of the Company’s projects in the Bahamas, accounted for $0.3 million, $6.2 million and $10.4 million of revenue in 2006, 2005 and 2004, respectively, reported in the construction division.

	(dollars in thousands) December 31,
	2006		2005		2004
Revenue by geographic areas:
U.S. and its territories	$	65,068	$	22,073	$	4,985
Netherlands Antilles		14,238		12,938		9,967
Antigua and Barbuda		3,767		2,983		1,863
French West Indies		4,985		6,853		6,131
Bahamas		17,565		26,917		16,866
Other foreign areas		—		18		1,722
Total	$	105,623	$	71,782	$	41,534
Property, plant and equipment, net, by geographic areas:
U.S. and its territories	$	4,834	$	6,840	$	10,948
Netherlands Antilles		657		297		1,199
Antigua and Barbuda		2,365		8,794		8,314
French West Indies		653		391		1,635
Bahamas		2,773		5,414		5,649
Other foreign areas		—		—		—
Total	$	11,282	$	21,736	$	27,745

(19) RELATED PERSON TRANSACTIONS

The Company’s policies and procedures provide that related person transactions be approved in advance by either the audit committee or a majority of disinterested directors.

The Company leases from the wife of Mr. Donald L. Smith, Jr., a director and former Chairman and Chief Executive Officer of the Company, a 1.8-acre parcel of real property in Deerfield Beach, Florida. This property is being used for the Company’s equipment logistics and maintenance activities. The property is subject to a 5-year lease entered into in January 2002 providing for rent of $95,000 per year. This rent was based on comparable rental contracts for similar properties in Deerfield Beach, as evaluated by management. There has been a verbal agreement to extend this lease for a year. This lease has been assumed by the purchaser of the construction division assets of which Mr. Donald Smith is a part.

The Company has entered into various construction and payment deferral agreements with an entity which owns and manages a resort project in the Bahamas in which Mr. Donald L. Smith Jr., a director and former Chairman and Chief Executive Officer of the Company, a prior director of the Company and a subsidiary of the Company are minority partners owning 11.3 percent, 1.55 percent and 1.2 percent, respectively. Mr. Smith is also a member of the entity’s managing committee.

• As of January 1, 2003, the Company entered into a payment deferral agreement with the resort project whereby several notes, which are guaranteed partly by certain owners of the project, evidenced a loan totaling $2.0 million owed to the Company. Mr. Donald Smith, Jr. issued a personal guarantee for the total amount due under this loan agreement to the Company. This loan was paid during 2006.

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• The Company has entered into construction contracts with the resort project. In late 2004, the Company entered into a $15.2 million contract, which contract was increased to $15.9 million, to construct a marina and breakwater for the same entity. The resort project secured third party financing for this latter contract. In connection with contracts on the project, the Company recorded revenues of $6.2 million for 2005. As of December 31, 2005, the marina and breakwater contract was substantially complete.

• The outstanding balance of trade receivables from the resort project was $0.3 million as of December 31, 2005. The outstanding balance of note receivables was $2.2 million as of December 31, 2005. The receivables were paid during 2006. The Company has recorded interest income of $28,138, $216,202 and $206,491 for the years ended December 31, 2006, 2005 and 2004, respectively. The billings in excess of cost were $0 and $50,922 as of December 31, 2006 and 2005, respectively.

• In the second quarter of 2005, the Company entered into a construction contract to build a $3.0 million residence on Lot 22 of the resort project whereby certain investors in the entity owning and managing the resort provide the funding for the construction of the residence. At December 31, 2005, the Company recorded revenue of $0.4 million with a backlog of $2.5 million in connection with this project. During 2006 the Company recorded revenue of $0.9 million. On December 31, 2006 and December 31, 2005 the receivable balance attributable to this job was $0.2 million. The cost in excess of billings and estimated earnings was zero and $20,247 at December 31, 2006 and December 31, 2005, respectively. Subsequent to the Company’s fiscal year end, on March 13, 2007, the Company and Mr. Smith entered into a Termination and Release Agreement. Under the terms of the agreement, Mr. Smith and the Company release each other from any further obligation related to Lot 22. Specifically, the Agreement provides that neither the Company nor Mr. Smith shall have any obligation to perform any services for or make any payments to each other. construction company

Refer to Note 26—Subsequent Events — Sale of Construction Division.

On June 6, 1991, the Company issued a promissory note in favor of Donald Smith, Jr., a director and former Chairman and Chief Executive Officer of the Company, in the aggregate principal amount of $2,070,000. The note provided that the balance due under the note was due on January 1, 2004, but this maturity date was extended by agreement between Mr. Smith and the Company to October 1, 2006. At December 31, 2005 $1.7 million was outstanding under the note. The balance under the note would have become immediately due and payable upon a change of control. This note was paid in October 2006.

The Company owned a 50% interest in ZSC South, a joint venture, which was liquidated in 2005. Mr. W. Douglas Pitts, a director, owned a 5% interest in the joint venture. Courtelis Company managed the joint venture’s operations and Mr. Pitts is the President of Courtelis Company. In the third quarter of 2005, the joint venture sold its last remaining parcel of land and the Company recorded a gain of $0.4 million.

On July 30, 2004, the Company purchased an electronic security services company managed and controlled by Mr. Ruzika, our former Chief Executive Officer, for approximately $4.7 million, subject to certain purchase price adjustments after the closing. The initial allocation of the assets of the company purchased was based on fair value and included $70,000 of working capital, $306,000 of property, plant and equipment, $2.6 million of customer contracts, $356,000 of deferred tax assets and $1.7 million of goodwill and other intangibles. The Company assumed $277,000 of deferred revenue liability. The Company paid the purchase price with a combination of $2.5 million in cash and 214,356 shares of the Company’s common stock. Additionally, on October 5, 2005, 13,718 shares were issued upon finalization of the purchase price adjustments.

106

Mr. James R. Cast, a former director, through his tax and consulting practice, provided services to us for more than ten years. The Company paid Mr. Cast $75,000, $59,400 and $59,400 for consulting services provided to the Company in 2006, 2005 and 2004, respectively. Mr. Cast resigned from the Board of Directors in January 2006.

The Company has entered into a retirement agreement with Mr. Richard Hornsby, former Senior Vice President and Director. He retired from the Company at the end of 2004. During 2005 he received his full salary. From 2006 he will receive annual payments of $32,000 for life. During 2003, the Company recorded an expense of $232,000 for services rendered; this amount was paid to Mr. Hornsby in 2005. The Company expensed the net present value of the obligation to pay Mr. Hornsby $32,000 annually for life, over his estimated remaining service period at the Company, during 2004. The net present value of the future obligation was estimated at $276,933 and $337,596 at December 31, 2006 and December 31, 2005, respectively.

On August 12, 2005, the Company entered into a Management Services Agreement, dated as of August 12, 2005 and retroactive to April 18, 2006 (the “Management Agreement”), with Royal Palm Capital Management, LLLP (“Royal Palm”), to provide management services. Royal Palm Capital Management, LLLP is an affiliate of Coconut Palm Capital Investors I Ltd. (“Coconut Palm”) with whom the Company completed a transaction on June 30, 2004, whereby Coconut Palm invested $18 million into the Company for purposes of the Company entering into the electronic security services industry. Richard Rochon, the Company’s Chairman, and Mario Ferrari, one of the Company’s directors, are principals of Coconut Palm and Royal Palm. Mr. Rochon has also been the Company’s acting Chief Executive Officer since the resignation of Steven Ruzika subsequent to December 31, 2006. Robert Farenhem, a principal of Royal Palm, was the Company’s interim Chief Financial Officer from April 18, 2005 through December 20, 2005, and once again in February 2007. See Note 26, Subsequent Events.

The management services to be provided include, among other things, assisting the Company with, among other matters, establishing certain office, accounting and administrative procedures, obtaining financing relating to business operations and acquisitions, developing and implementing advertising, promotional and marketing programs, facilitating certain securities matters (both proposed offerings and ongoing compliance issues) and future acquisitions and dispositions, developing tax planning strategies and formulating risk management policies. Under the terms of the Management Agreement, the Company is obligated to pay Royal Palm a management fee in the amount of $30,000 per month. In connection with this agreement, the Company incurred $360,000 and $274,702 during the year ended December 31, 2006 and December 31, 2005, respectively.

In addition, the Company leases certain office space to Royal Palm under an agreement dated January 1, 2006. For the period ending December 31, 2006 Royal Palm paid a total of $90,000 in rent to the Company.

On January 23, 2006, the Company entered into a stock purchase agreement with Donald L. Smith, Jr., a director and former Chairman and Chief Executive Officer, under the terms of which the Company agreed to sell to Mr. Smith all of the issued and outstanding shares of two of our subsidiaries, Antigua Masonry Products, Ltd., an Antigua corporation, or AMP, and M21 Industries, Inc., which subsidiaries collectively comprised the operations of the Company’s materials division in Antigua, for an aggregate purchase price equal to approximately $5 million, subject to adjustments provided in the stock purchase agreement. The stock purchase agreement permitted $1,725,000 of the purchase price to be paid by cancellation of a note payable by the Company to Mr. Smith. The Company retained the right to review other offers to purchase these Antigua operations. The parties to the stock purchase agreement elected to exercise their right to negotiate the sale of the Company’s materials division in Antigua with a third party. As a result, on March 2, 2006, the Company entered into a stock purchase agreement with A. Hadeed or his nominee and Gary O’Rourke and terminated the stock purchase agreement entered into with Mr. Smith on January 23, 2006. The terms of the new stock purchase agreement provided for a purchase price equal to approximately $5.1 million, subject to adjustments provided in the stock purchase agreement. The entire purchase price was contemplated to be paid entirely in cash as opposed to the partial payment through surrender of the $1,725,000 note the Company had previously issued to Mr. Smith. In addition, the terms of the new stock purchase agreement excluded M21 Industries, Inc. from the sale but contemplated transfers of certain assets from the Antigua operations to Devcon as well as the pre-closing transfer to AMP of certain preferred shares in AMP that were owned by Devcon. The purchaser agreed to pay all taxes incurred as a result of the transaction. The Company completed the sale of its materials division in Antigua on May 2, 2006.

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(20) COSTS AND ESTIMATED EARNINGS ON CONTRACTS

Costs and estimated earnings on contracts are included in the accompanying consolidated balance sheets under the following captions:

	(dollars in thousands) December 31,
	2006			2005
Costs and estimated earnings in excess of billings	$	1,485		$	2,066
Billings in excess of costs and estimated earnings		(1,037	)		(1,256	)
	$	448		$	810
Costs incurred on uncompleted contracts	$	45,867		$	38,940
Costs incurred on completed contracts		25,176			13,283
Estimated earnings		9,227			11,410
		80,270			63,633
Less: Billings to date		79,822			62,823
	$	448		$	810

(21) COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases real property, buildings and equipment under operating leases that expire over periods of one to ten years. Future minimum lease payments under non-cancelable operating leases with terms in excess of one year as of December 31, 2006 are as follows:

	(dollars in thousands)
Years ending December 31,	Property		Vehicles and Equipment		Total
2007	$	2,276	$	640	$	2,916
2008		1,503		627		2,130
2009		1,486		415		1,901
2010		1,160		161		1,321
2011		896		12		908
Thereafter		3,584		—		3,584
Total Minimum lease payments	$	10,905	$	1,855	$	12,760

Total rent expense for property was $2,080,216, $1,636,474 and $1,716,825 in for the years ended December 31, 2006, 2005 and 2004, respectively. Total operating lease and rental expense for vehicles and equipment was $1,790,724, $2,747,793 and $1,977,277 for the years ended December 31, 2006, 2005 and 2004, respectively. The equipment leases are normally on a month-to-month basis. Some operating leases provide for contingent rentals or royalties based on related sales and production; contingent rent expense amounted to $4,865, $16,274 and $12,549 for the years ended December 31, 2006, 2005 and 2004, respectively.

The Company received a rent holiday of five months and a leasehold incentive of $68,500 when the Company renewed the lease for its office location in Deerfield Beach, Florida starting January 1, 2004. The

108

Company received a leasehold incentive of $559,102 for the principal executive offices in Boca Raton, Florida, which was utilized over the first ten months of 2006. Under SFAS No. 13, a deferred rent liability of $701,120 was recorded for these two leases. The leasehold improvements are being amortized through the end of the initial lease terms, excluding renewal periods, through May 2009 and August 2015 for Deerfield Beach and Boca Raton, respectively.

Legal Matters

Northshore Partners

During the second quarter of 2002, the Company issued a construction contract performance guarantee together with one of the Company’s customers, Northshore Partners, Inc., (“Northshore”), in favor of Estate Plessen Associates L.P. and JPMorgan Chase Bank, for $5.1 million. Northshore Partners was an important customer on St. Croix and the construction contract that Northshore Partners had with Estate Plessen Associates L.P. had requirements for the Company’s construction materials. The Company provided a letter of credit for $500,000 as collateral for its performance guarantee. The construction project was finished in September 2003 and the performance guarantee expired, without a claim being made, in 2005. The Company received an up front fee of $154,000, recognition of which was deferred until expiration of the guarantee and determination that the Company had no contingent liability. Such determination was made and the $154,000 fee was recognized in the third quarter of 2005.

Yellow Cedar

In the fall of 2000, VICBP, a subsidiary, was under contract with the Virgin Islands Port Authority, or VIPA, for the construction of the expansion of the St. Croix Airport. During the project, homeowners and residents of the Yellow Cedar Housing Community, located next to the end of the expansion project, claimed to have experienced several days of excessive dust in their area as a result of the ongoing construction work and have claimed damage to their property and personal injury. The homeowners of Yellow Cedar have filed two separate lawsuits for unspecified damages against VIPA and VICBP as co-defendants. In both cases VICBP, as defendant, has agreed to indemnify VIPA for any civil action as a result of the construction work. VICBP brought a declaratory judgment action in the District Court of the Virgin Islands to determine whether there is coverage under the primary policy. On October 23, 2007, the declaratory judgment was ruled in favor of insurers and we have since filed an Appeal of the Denial. If the Appeal of the Denial for the Company’s Summary Judgment is favorable to us, VICBP would be liable for the $50 per claim and the original $50,000 deductible. However, this was satisfied when the initial claims were resolved with claimants. Additionally, the Company will recover its legal expenses for pursuing the Summary Judgment.

VICBP cannot accurately estimate actual damages to the claimants since a significant part of the property damage claims were resolved prior to the litigation and credible evidence of the bodily injury portion of the lawsuit has not been presented. Additionally, because the legal process continues, VICBP is unable to determine how all of the facts of this matter will be resolved under St. Croix environmental law. As a result of all the uncertainties, the outcome cannot be reasonably determined at this time and the Company is unable to estimate the loss, if any, in accordance with FASB No. 5, “Accounting for Contingencies” (“FASB No. 5”). However, we do not believe that the outcome will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

Petit

On July 25, 1995, the Company’s subsidiary, Societe des Carrieres de Grande Case, or SCGC, entered into an agreement with Mr. Fernand Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, collectively referred to as, Petit, to lease a quarry located in the French side of St. Martin. Another lease was entered into by SCGC on October 27, 1999 for the same and additional property. Another Company subsidiary, Bouwbedrijf Boven Winden, N.A., or BBW, entered into a materials supply agreement with Petit on July 31, 1995. This materials supply agreement was amended on October 27, 1999 and under the terms of this amendment the Company became a party to the materials supply agreement.

In May 2004, the Company advised Petit that the Company would possibly be removing our equipment within the time frames provided in our agreements and made a partial quarterly payment under the materials supply agreement. On June 3, 2004, Petit advised the Company in writing that Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that Petit would not renew the 1999 lease when it expired on October 27, 2004. Petit refused to accept the remainder of the quarterly payment from us in the amount of $45,000.

Without prior notice to BBW, Petit obtained orders to impound BBW assets on St. Martin (the French side) and Sint Maarten (the Dutch side). The assets sought to be impounded included bank accounts and receivables. BBW has no assets on St. Martin, but approximately $341,000 of its assets have been impounded on Sint Maarten. In obtaining the orders, Petit claimed that $7.6 million is due on the supply agreement (the full payment that would be due by us if the contract continued for the entire potential term and the Company continued to mine the quarry), $2.7 million is due for quarry restoration and $3.7 million is due for pain and suffering for a total claim amounting to $14.0 million. The materials supply agreement provided that it could be terminated by us on July 31, 2004.

In February 2005, SCGC, BBW and Devcon entered into agreements with Petit, which provided for the following:

• The purchase by SCGC of three hectares of land located within the quarry property previously leased from Petit for approximately $1.1 million;

• A two-year lease of approximately 15 hectares of land (the “15 Hectare Lease”), on which SCGC operates a crusher, ready-mix concrete plant and aggregates storage at a total cost of $100,000, which arrangement was entered into February 2005;

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• The granting of an option to SCGC to purchase two hectares of land (the “2 Hectare Option”) prior to December 31, 2006 for $2 million, with $1 million due on each of December 31, 2006 (was paid in September 2006) and December 31, 2008, subject to the terms below:

• In the event that SCGC exercises this option, Petit agrees to withdraw all legal actions against us and our subsidiaries;

• In the event that SCGC does not exercise the option to purchase and Petit is subsequently awarded a judgment, SCGC has the option to offset approximately $1.2 million against the judgment amount and transfer ownership of the three hectare parcel purchased by SCGC back to Petit;

• The granting of an option to SCGC to purchase five hectares of land (the “5 Hectare Option”) prior to June 30, 2010 for $3.6 million, payable $1.8 million on June 30, 2010 and $1.8 million on June 30, 2012; and

• The granting of an option to SCGC to extend the 15 Hectare Lease through June 30, 2010 (with annual rent of $55,000) if the 2 Hectare Option is exercised and subsequent extensions, if the 5 Hectare Option is exercised, of the lease (with annual rent of $65,000) equal to the terms of mining authorizations obtained from the French Government agencies.

In February 2005 the Company purchased the three hectares of land for $1.1 million in cash and executed the 15 Hectare Lease.

In September 2006 the Company exercised the 2 Hectare Option and transferred $1 million in cash to the appropriate agent of Petit. It is currently our intention to make the additional $1 million payment required under the option agreement on December 31, 2008 to the appropriate agent of Petit.

As of December 31, 2006, Petit has refused to accept the $1 million payment unless Devcon International Corp., the parent company, agrees to guarantee payment of the $1 million due on December 31, 2008. As Devcon International Corp. was not referenced in or party to the 2 Hectare Option, the Company believes that Petit’s request is without merit. Currently, the $1 million remains on deposit with the appropriate third-party escrow agent pending the outcome of this dispute. It is management’s position that based on the circumstances leading up to the current legal claims made by Petit, the Company is unable to either reasonably estimate or determine the outcome of these claims.

Under the terms of the 15 Hectare Lease, Petit agreed that an adjacent 6,000 square meter parcel, on which SCGC’s aggregate wash plant, scale, maintenance building and administrative offices are located, was included. SCGC has been operating its aggregate wash plant, scale, maintenance building and administrative offices on the adjacent property without incident or dispute with Petit for eleven years. Subsequent to refusing to accept the $1 million option payment, Petit has taken steps to impede SCGC’s ability to access the 6,000 square meters of property, resulting in SCGC’s inability to access the aggregate wash plant, scale, maintenance building and administrative facilities required to carry out its mining operation. Petit now claims that the 6,000 square meters is located elsewhere on the parcel. Currently quarry operations have ceased and sales of mined aggregate to third parties have ceased. However, during 2006, the Company’s ready mix operation in St. Martin was not affected. In late 2006, the Company began importing aggregate from third party vendors in anticipation of the Petit non compliance. In March 2007, Petit blocked access to our ready-mix operation. Accordingly, the ready-mix operation has ceased and the Company is attempting to enforce easements to the owned and leased parcels. Under St. Martin labor compensation laws, the Company does not incur the full cost of employee salaries if they are prevented from working under situations such as this dispute.

The Company has engaged French legal counsel to pursue SCGC’s rights under the agreements executed in February 2005. At this time, it is the Company’s position that any asserted claims would arise from SCGC since it is suffering losses due to its inability to utilize its ready-mix operation. Any claim would be considered a gain contingency and therefore under SFAS No. 5 would not be recorded.

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Senior Credit Facility

The Company’s Senior Loan provided by CIT issued in February 2005 was refinanced in November 2005. Accordingly, with its repayment, a non-recourse performance guarantee secured by the Company’s stock in DSH was released.

In connection with the CIT Senior Loan repayment, and financing the acquisition of Coastal Security Services in November 2005, the Company entered into a $70 million revolving credit agreement with CapitalSource Finance LLC replacing in full the CIT facility. The specific terms of the CapitalSource revolving credit facility are more specifically described in Note 10, Debt. The Company signed a non-recourse performance guarantee with CapitalSource and pledged, as collateral, the Company’s stock in DSH. In connection with the March 2006 acquisition of Guardian, the Company increased the facility with CapitalSource to $100 million.

General

The Company is subject to certain Federal, state and local environmental laws and regulations. Management believes that the Company is in compliance with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse effect in the foreseeable future.

(22) BUSINESS AND CREDIT CONCENTRATIONS

For the construction and materials divisions, the Company’s customer base is primarily located in the Caribbean with the most substantial credit concentration within the Construction division. Typically, customers within this division engage the Company to develop large marinas, resorts and other site improvements and consequently, make up a larger percentage of total sales.

For the years ended December 31, 2006, 2005 and 2004, the Company reported revenue for one Bahamian customer of 0.9%, 7.3% and 15.3% of total revenue respectively. As of December 31, 2006 and December 31, 2005, the ongoing project for the abovementioned customer had backlog of zero and $0.3 million, respectively. A subsidiary and one of the Company’s directors are minority owners of and the director is a member of the managing committee of the entity developing this project. As of December 31, 2006, the total receivable balance from this customer is $0.3 million related to the construction project in the Bahamas.

For the period ended December 31, 2006, there were four customers that represented more than 10% of construction receivables. As of December 31, 2006, the total receivable from these customers was $0.9 million, $0.8 million, $0.8 million and $0.7 million, respectively. These amounts include retention billings of $0.2 million, $0.8 million, $0.2 million and $0.4 million, respectively. Although receivables are generally not collateralized, the Company may place liens or their equivalent in the event of nonpayment. The Company estimates an allowance for doubtful accounts based on the creditworthiness of customers as determined by specific events or circumstances and by applying a percentage to the receivables within a specific aging category.

For the year ended December 31, 2006, three customers in the construction division accounted for more than 10% of total sales for this division. One customer in the U.S. Virgin Islands accounted for 12.4%, one in Antigua accounted for 11.1% and one in the Bahamas accounted for 10.9% of total sales for the construction division.

For the year ended December 31, 2006, one customer in the materials division accounted for $4.5 million, or 28.7%, of total sales for this division.

No single customer within the security division accounted for more than 10% of total sales. For the electronic security services division, the Company’s customer base is concentrated in Florida and the New York City, New York metropolitan area.

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The Company has a union agreement with certain of its employees on Antigua and Barbuda. The union contract expired in November 2006 and is in the process of being renegotiated. In the interim, the Company is honoring the terms of the original agreement. There have been no labor conflicts in the past.

The Company has a union agreement with certain of its employees working for Mutual Alarm. The contract expires in June, 2007. There have been no labor conflicts in the past.

(23) EMPLOYEE BENEFITS

The Company provides, to certain employees, defined retirement and severance benefits. Accrued expenses which arise in accordance with these benefits are based upon periodic actuarial valuations which use the projected unit credit method for calculation and are charged to the consolidated statements of operations in a systematic basis over the expected average remaining service lives of current employees who are eligible to receive the required benefits. The net expense with respect to certain of these required benefits is assessed in accordance with the advice of professional qualified actuaries. The net expense included in the consolidated statements of operations for the years ended December 31, 2006, 2005 and 2004 was $0.7 million, $0.8 million and $1.0 million, respectively. The actuarial present value of the accumulated benefits at December 31, 2006 and 2005 was $3.4 million and $5.0 million, respectively.

The obligations which arise under these plans are not governed by any regulatory agency and there is no requirement to fund the obligations and accordingly the Company has not done so. Obligations which are payable to employees upon retirement or separation with the Company are paid from cash on hand at the time of retirement or separation in accordance with the terms of the respective plans.

The following sets forth the estimated cash payments required to be paid out to eligible employees for the next five years:

	(dollars in thousands)
2007	$	453
2008		457
2009		446
2010		446
2011		516

	(dollars in thousands)
	U.S. Pension						Foreign Pension
	2006			2005			2006			2005
Weighted avg. discount rate		4.5	%		4.3	%		5.0	%		5.0	%
Expected return on plan assets		N/A			N/A			N/A			N/A
Rate of compensation increase		0.0	%		0.0	%		0.0	%		3.0	%
Service cost	$	80		$	98		$	—		$	61
Net pension costs	$	125		$	370		$	—		$	272

The Company sponsors various 401(k) plans for some employees over the age of 21 who have completed a minimum number of months of employment. The Company matches employee contributions between 3.0% and 4.0% of an employee’s salary. Company contributions totaled $325,133, $267,499 and $173,994 in 2006, 2005 and 2004, respectively.

(24) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of financial instruments including cash, cash equivalents, the majority of the accounts receivable, other current assets, accounts payable trade and other, accrued expenses and other liabilities, and notes payable to banks approximated fair value at December 31, 2006 because of the short maturity of these instruments. The carrying value of debt and most notes receivable approximated fair value at December 31, 2006 and 2005 based upon the present value of estimated future cash flows.

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(25) SELECTED QUARTERLY DATA (Unaudited)

	(Amounts shown in thousands except share and per share data information)
	2006 Quarters (as restated)												2005 Quarters
	1st			2nd			3rd			4th			1st			2nd			3rd			4th
Revenue	$	23,849		$	28,551		$	26,141		$	27,082		$	15,059		$	19,220		$	16,680		$	20,823
Gross Margin		4, 802			9,870			6,351			9,431			4, 153			4,189			640			4,882
(Loss) income from:
Continuing operations		(9,254	)		(361	)		(11,093	)		(8,988	)		(2,160	)		(1,598	)		(4,364	)	$	(7,270	)
Discontinued operations		483			(56	)		(148	)		15			595			1,178			2,580			(3,277	)
Net (loss) income		(8,771	)		(417	)		(11,241	)		(8,973	)		(1,565	)		(420	)		(1,784	)		(10,547	)
Basic Net (Loss) income per common share
Continuing operations	$	(1.54	)	$	(0.06	)	$	(1.84	)	$	(1.49	)	$	(0.37	)	$	(0.27	)	$	(0.73	)	$	(1.21	)
Discontinued operations		0.08			(0.01	)		(0.02	)		(0.00	)		0.10			0.20			0.43			(0.55	)
Net (Loss)		(1.46	)		(0.07	)		(1.86	)		(1.49	)		(0.27	)		(0.07	)		(0.30	)		(1.76	)
Diluted Net (Loss) income per common share
Continuing operations	$	(1.54	)	$	(0.06	)	$	(1.84	)	$	(1.49	)	$	(0.37	)	$	(0.27	)	$	(0.73	)	$	(1.21	)
Discontinued operations		0.08			(0.01	)		(0.02	)		(0.00	)		0.10			0.20			0.43			(0.55	)
Net (Loss)		(1.46	)		(0.07	)		(1.86	)		(1.49	)		(0.27	)		(0.07	)		(0.30	)		(1.76	)

(26) SUBSEQUENT EVENTS

Resignation of Chief Executive Officer. On January 22, 2007, Mr. Stephen J. Ruzika resigned as Chief Executive Officer of the Company. Also on January 22, 2007, the Board of Directors of the Company appointed Richard C. Rochon, the Company’s Chairman of the Board, to the position of Acting Chief Executive Officer of the Company. Mr. Rochon has been the Company’s Chairman since January 24, 2006, and a director of the Company since 2004. Mr. Rochon is Chairman and Chief Executive Officer of Royal Palm Capital Partners, a private investment and management firm. He is also a Principal of Royal Palm Capital Management, LLLP, an affiliate of Royal Palm Capital Partners.

Resignation of Chief Financial Officer. On February 9, 2007, Mr. George M. Hare resigned as Chief Financial Officer of the Company. On February 13, 2007, the Board of Directors of the Company appointed Robert C. Farenhem, a Principal of Royal Palm Capital Management, LLLP, to the position of interim Chief Financial Officer of the Company. Mr. Farenhem has been a Principal and the Chief Financial Officer of Royal Palm Capital Partners since April 2003 and has been a director and officer of Coconut Palm Acquisition Corp., a blank check company, since April 29, 2005. Between April 18, 2005 and December 20, 2005, Mr. Farenhem was the Company’s interim Chief Financial Officer.

Sale of Construction Division. On March 21, 2007, the Company completed the transactions contemplated by a certain Asset Purchase Agreement, dated as of March 12, 2007 ("Asset Purchase Agreement"), by and between the Company and BitMar Ltd., a Turks and Caicos corporation and successor-in-interest to Tiger Oil, Inc., a Florida corporation ("Purchaser"), consisting of the sale of fixed assets, inventory and customer lists constituting a majority of the assets of the Company's construction division ("Construction Division"), for approximately $5.3 million, subject to a holdback of $525,000 to be retained for resolution of certain indemnification matters in the form of a non-negotiable promissory note bearing a term of 120 days. The Company retained working capital of $6.7 million, including approximately $2.1 million in notes receivable, as of December 31, 2006. The majority of the Company's leasehold interests were retained by the Company with the Purchaser assuming only the Company's shop location at Southwest 10th Street, Deerfield Beach, Florida and entering into a 90-day sublease of the headquarters of the Construction Division located at 1350 East Newport Center Drive in Deerfield Beach, Florida. In addition, the Company entered into a three-year noncompetition agreement under the terms of which the Company agreed not to engage in business competitive with that of the Construction Division in any country, territory or other area bordering the Caribbean Sea and the Atlantic Ocean ("Territory"), excluding any production and distribution of ready-mix concrete, crushed stone, sand, concrete block, asphalt and bagged cement throughout the Territory and also agreed to other standard provisions concerning the non-solicitation of customers and employees of the Construction Division. In addition, Seller and Purchaser entered into a Transition Services Agreement (“Transition Services Agreement”) under the terms of which, Seller has agreed to make available certain of Seller's employees and independent contractors and other non-employees to assist Purchaser with the operation of the Construction Division through September 16, 2007.

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As a result of this transaction, in the fourth quarter of 2006, the Company recognized an impairment charge on the construction assets of approximately $2.8 million. An additional loss on the sale of these assets of $261,828 was recorded during the nine months ended September 30, 2007 upon final transfer of assets to the Purchaser. During the quarter ended March 31, 2007, the Company established an accrued liability of $201,659 for the Deerfield lease in accordance with FASB No. 146 “Accounting for Costs Associated with Exit or Disposal Activities (“FASB No. 146”).” The Company also accrued employee severance and retention costs in accordance with FASB No. 146 amounting to $759,742. During the three months ended September 30, 2007, the Company accrued an additional $391,000 which comprised of costs associated with additional contingencies, unanticipated jurisdictional employment requirements, and costs associated with closure of certain plant facilities. Donald L. Smith, Jr., the Company’s former Chairman and Chief Executive Officer and a current director of the Company and Donald L. Smith, III, a former officer of the Company, are principals of the Purchaser. Other than the Asset Purchase Agreement, Transition Services Agreement, and the Company’s relationship with Donald L. Smith, Jr. and Donald L. Smith, III, there is no material relationship between the Company and the Purchaser of which the Company is aware.

Discontinued of Operations. On March 30, 2007, the Board of Directors approved a board resolution to authorize management to sell the remaining assets of the Construction, Materials and Utilities Divisions upon such terms and conditions, including price, as management determines to be appropriate.

“Forbearance and Amendment Agreements. On April 2, 2007, effective as of March 30, 2007, the Company entered into Forbearance and Amendment Agreements (the “Forbearance Agreements) with certain institutional investors (the “Required Holders”) holding, in the aggregate, a majority of the Company’s previously-issued Series A Convertible Preferred Stock (the “Series A Preferred Stock”).

Under the terms of these Forbearance Agreements, the Required Holders agreed that for a period of time ending no later than January 2, 2008, they shall each refrain from taking any remedial action with respect to the Company’s failure (the “Effectiveness Failure”) to have declared effective by the United States Securities and Exchange Commission a registration statement registering the resale of the shares of Devcon’s common stock underlying the Series A Preferred Shares and warrants as required by a Registration Rights Agreement, dated February 20, 2005, by and between the Company, the Required Holders and the remaining holder of the Series A Preferred Shares (the “Registration Rights Agreement”). The parties also agreed to refrain from declaring the occurrence of any “Triggering Event” with respect to the Effectiveness Failure and from delivering any Notice of Redemption at Option of Holder with respect thereto or demanding any amounts due and payable with respect to the Effectiveness Failure, including without limitation, any Registration Delay Payments. No remedial actions were taken by the Required Holders.

Pursuant to the terms of these Forbearance Agreements, the Company agreed to submit to its shareholders for approval at the Company’s annual shareholder meeting a form of Amended and Restated Certificate of Designations (the “Amended Certificate of Designations”) setting forth certain revised terms of the Series A Preferred Stock as described in the Forbearance Agreements. On June 29, 2007, the Company’s shareholders approved the Amended Certificate of Designations at the Company’s annual shareholder meeting. The Company filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date.

In connection with the filing of the Amended Certificate of Designations, the Company and the parties to the Forbearance Agreements entered into an Amended and Restated Securities Purchase Agreement, dated as of July 13, 2007 (the “Amended Securities Purchase Agreement”), and an Amended and Restated Registration Rights Agreement, dated as of July 13, 2007 (the “Amended Registration Rights Agreement”).

The Amended Securities Purchase Agreement contains terms similar to the original Securities Purchase Agreement entered into among the parties on February 10, 2006 except that one holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of the Company’s common stock, par value $.10 (the “Common Stock”). The Amended Certificate of Designations also included a reduction in the conversion price of the Series A Preferred Shares to $6.75, allowance for the accrual of dividends on the Series A Preferred Shares at a rate equal to 10% per annum, which dividends may be payable in kind, and a revision of the definition of the Leverage Ratio. The revised definition shall provide for the Leverage Ratio to be calculated as a multiple of recurring monthly revenue (“Performing RMR”) as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant to require the Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30, 2008. In addition, each of the parties to the Amended Securities Purchase Agreement waived certain rights to receive Registration Delay Payments and certain other provisions set forth in the governing documents. In addition, the parties executed an Amended and Restated Registration Rights Agreement which removed the obligation to have declared effective by the United States Securities and Exchange Commission by January 2, 2008 a registration statement registering the resale of the shares of Devcon’s common stock underlying the Series A Preferred Shares and warrants as required by the Registration Rights Agreement, dated February 20, 2005.

With respect to the other holder of the Series A Convertible Preferred Stock, which did not enter into the Forbearance Agreements but had filed a lawsuit against the Company, on August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement Agreement”) pursuant to which the Company resolved all claims against the Company set forth in the lawsuit such holder filed. See Settlement with Preferred Stockholder below.

On June 29, 2007, the Company’s shareholders approved the Amended Certificate of Designations at the Company’s annual shareholder meeting. The Company filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date. In connection with the filing of the Amended Certificate of Designations, the Company and the parties to the Forbearance Agreements entered into the Amended SPA and the Amended and Restated Registration Rights Agreement. The Amended SPA contains terms similar to the original SPA entered into among the parties on February 10, 2006, except that one holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of the Company’s common stock, and the parties thereto acknowledged and agreed that the Company’s dividend payment obligations with respect to the Preferred Stock accruing from January 1, 2007 through the Closing date (July 13, 2007) of the Amended SPA have been satisfied by adding such dividends to the Stated Value of the shares of Preferred Stock. Thus, the Company now has the option of paying the dividends in-kind and not to deplete cash resources for these dividend payments. At September 30, 2007, approximately $2.9 million of accrued dividends were paid in-kind and reclassified to the carrying value of the Preferred Stock. The Company filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date.

CapitalSource Credit Agreement. On September 25, 2007, certain subsidiaries (the “Borrowers”) of the Company entered into a Consent and Fifth Amendment (the “Fifth Amendment”) with CapitalSource Finance LLC (“CapitalSource”). The Fifth Amendment to the Credit Agreement dated as of November 10, 2005, as amended, increased the total commitment to $105.0 million from $100.0 million (with the borrowers having the ability to increase this commitment further to $125.0 million), extended the maturity date of the Credit Agreement to September 25, 2010, and adjusted the interest rate and certain financial and other covenants provided therein. The proceeds from the Credit Agreement were used to partially fund the redemption of certain shares of the Company’s Preferred Stock in connection with settlement arrangements the Company had entered into to settle all claims set forth in the lawsuit (the “Lawsuit”) disclosed under the caption “Series A Convertible Preferred Stockholder” in “Item 3—Legal Proceedings.”

Repurchase Plan. On July 24, 2007, the Company’s Board of Directors approved the repurchase of up to $5.0 million of its common stock between July 24, 2007 and December 31, 2008. At September 30, 2007, the Company had repurchased 163,834 shares for a total cost of $0.6 million.

Settlement with Preferred Stockholder. On August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement Agreement”) pursuant to which, subject to the payment of the Settlement Amount set forth below, the Company resolved all claims against the Company set forth in the lawsuit (the “Lawsuit”) disclosed under the Caption “Series A Convertible Preferred Stockholder” in “Item 3—Legal Proceedings.” Pursuant to the Settlement Agreement, on September 28, 2007, the Company paid one of the plaintiffs in the Lawsuit an amount equal to $7.4 million, which included accrued dividends since January 1, 2007, (the “Settlement Amount”), and the plaintiffs returned all shares of the Company’s Preferred Stock held by them to the Company. In return, all parties to the Lawsuit entered into mutual releases releasing each other from any and all claims.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

During 2006 we changed our independent registered public accounting firm from KPMG, LLP to Berenfeld, Spritzer, Shechter & Sheer. We have had no disagreements with either independent registered public accounting firm on accounting and financial disclosure. For more information with respect to this matter, see our Report on Form 8-K filed on July 12, 2006.

Item 9A. Controls and Procedures

The Company has carried out an evaluation under the supervision and with the participation of its management, including its acting Chief Executive Officer and its Chief Financial Officer, who is also acting as the Company’s Principal Financial and Accounting Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined the Company’s disclosure controls and procedures as of December 31, 2006, the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, such officers have concluded that, as of December 31, 2006, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission, 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 management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

In connection with the completion of its audit of, and the issuance of an unqualified report on, the Company’s consolidated financial statements for the fiscal year ended December 31, 2006, the Company’s independent registered public accounting firm, Berenfeld, Spritzer, Shechter & Sheer (“BSS&S”), communicated to the Company’s management and Audit Committee that certain matters involving the Company’s internal controls were considered to be “material weaknesses”, as defined under the standards established by the Public Company Accounting Oversight Board, or PCAOB. These matters pertained to (i) inadequate policies and procedures with respect to review and oversight of financial results to ensure that accurate consolidated financial statements were prepared and reviewed on a timely basis, (ii) inadequate number of individuals with U.S. GAAP experience and (iii) inadequate review of account reconciliations, analyses and journal entries.

In light of the material weaknesses described above, the Company performed additional analyses and other post-closing procedures to ensure the Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly represent in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

The certifications of the Company’s acting Chief Executive Officer and the Company’s Chief Financial Officer, who has also been acting as the Company’s Principal Financial and Accounting Officer, required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, are attached as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of the Company’s disclosure controls and procedures and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.

Changes in Internal Controls Over Financial Reporting and Management’s Remediation Initiatives

The Company is committed to continuously improving its internal controls and financial reporting. The Company is working with consultants with experience in internal controls to assist management and the Audit Committee in reviewing the Company’s current internal controls structure with a view towards meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act.

In order to remediate the significant deficiencies and material weaknesses described above, the Company’s management and its Audit Committee will be taking the following steps:

• Certain of the Company’s procedures have been formalized and documented with respect to review and oversight of financial reporting.

• The Company has shortened the period between review cycles and continues to enhance certain mitigating controls which will provide additional analysis of financial reporting information.

• The Company has implemented a financial reporting timeline and checklist process to assist in the timely gathering and review of financial information.

• The Company has obtained the services of qualified individuals with appropriate U.S. GAAP experience.

• The Company is integrating accounting staffs and systems between acquired subsidiaries to facilitate standardized financial accounting and reporting procedures.

• The Company has implemented account reconciliation processes, and expanded senior management reviews and analyses, including the review of journal entries.

The Company has continuously experienced turnover in key positions within the financial organization. This has delayed the Company’s ability to implement the proper measures to ensure that the internal controls over financial reporting are functioning. The Company believes the above measures have reduced the risks associated with the matters identified by the Company’s independent registered public accounting firm as material weaknesses. This process is ongoing, however, and the Company’s management and its Audit Committee will continue to monitor the effectiveness of the Company’s internal controls and procedures on a continual basis and will take further action as appropriate.

In connection with the preparation of our Form 10-Q for the quarter ended June 30, 2007, management identified certain adjustments that were required to be recorded within the Form 10-Q for the quarters ended March 31, 2007, June 30, 2007 and for the year ended December 31, 2006. The adjustments to our financial statements involved the identification, valuation and resulting accounting for embedded derivatives and warrants associated with our Series A Convertible Preferred Stock. Our management believes that our failure to properly value and identify these adjustments indicates the existence of certain material weaknesses in our internal control over financial reporting. As a result of the existence of those material weaknesses, our management concluded that our disclosure controls and procedures were ineffective as of December 31, 2006.

A number of initiatives to strengthen our internal controls over financial reporting were initiated in May 2007 and have continued since then. These include:

• Establishment of more robust review process by senior management for high risk areas

• Implementation of specific review procedures for the review and recording of derivative instruments.

• Working closer with consultants in the identification and valuation of derivatives.

• In March 2007, we retained independent consultants trained in accounting and financial reporting who are CPAs. One of our consultants was a former partner with a national public accounting firm and has experience with the requirements of Section 404 of the Sarbanes-Oxley Act.

• Hiring more staff with higher technical experience in the area of financial reporting and complex accounting issues.

The continued implementation of policies and procedures, as well as other initiatives to remediate the identified material weaknesses is among our highest priorities. Management and our Audit Committee will continually assess the progress and sufficiency of these initiatives and make the appropriate adjustments as and when required. As of the date of this report, our management believes that the plan outlined above, when completed, will remediate the material weaknesses in internal controls over financial reporting as described above.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Our directors and executive officers, as of March 31, 2007, are as follows:

Name	Age	Position(s) held with the Company
Richard C Rochon.	49	Chairman of the Board and Acting Chief Executive Officer
Donald L. Smith, Jr.	85	Director
Richard L. Hornsby	71	Director
W. Douglas Pitts	67	Director
Gustavo R. Benejam	51	Director
Mario B. Ferrari	29	Director
Per-Olof Lööf	56	Director
P. Rodney Cunningham	59	Director
Donald K. Karnes	56	Director
Robert C. Farenhem	36	Chief Financial Officer
Ron Lakey	52	President and Chief Operating Officer

Richard C. Rochon, has been our Chairman since January 24, 2006 and a director of ours since 2004. In addition, he has been our Acting Chief Executive Officer since January 2007. Mr. Rochon is currently Chairman and Chief Executive Officer of Royal Palm Capital Partners, a private investment and management firm that he founded in March 2002. Mr. Rochon is currently a director of CBIZ, Inc. and has been since his election in October 1996. From 1985 to February 2002, Mr. Rochon served in various capacities with, and most recent as President of, Huizenga Holdings, Inc., a management and holding company owned by H. Wayne Huizenga. Mr. Rochon has also served as a director of, and is currently Chairman of, SunAir Services, Inc., a provider of pest-control and lawn care services since February 2005. Mr. Rochon was a director of Bancshares of Florida, a full-service commercial bank from 2002 until February 2007. In September 2005, Mr. Rochon became Chairman and CEO of Coconut Palm Acquisition Corp., a newly organized blank check company. Mr. Rochon was also employed as a certified public accountant by the public accounting firm of Coopers and Lybrand from 1979 to 1985. Mr. Rochon received his B.S. in accounting from Binghamton University in 1979 and Certified Public Accounting designation in 1981.

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Donald L. Smith, Jr., our co-founder, has served as a director since 1951. Mr. Smith served as our Chairman of the Board from our inception in 1951 to January 24, 2006. From 1951 until April 2005, he also served as our Chief Executive Officer, and from 1951 until October 2004, he served as our President. Mr. Smith was retired since April 2005 until Bitmar Ltd., a company with which Mr. Smith is affiliated as part owner and Vice President purchased the assets of our construction division.

Richard L. Hornsby, a director of ours since 1975, served as our Executive Vice President from March 1989 to December 2004. Mr. Hornsby served as our Vice President from August 1986 to February 1989. From September 1981 until July 1986 he was Financial Manager of R.O.L., Inc. and L.O.R., Inc., companies primarily engaged in various private investment activities. He has been a director of Devcon since 1975 and served as Vice President-Finance from 1972 to 1977.

W. Douglas Pitts, a director of ours since 1996, is Chairman of the Board and Chief Executive Officer of Courtelis Company, which is engaged primarily in various real estate development activities. Prior to his selection as Chairman of the Board and Chief Executive Officer in December 1995, Mr. Pitts served as Executive Vice President and Chief Operating Officer of Courtelis Company from 1983 to 1995.

Gustavo R. Benejam, a director of ours since 2003, is currently providing consulting services to various companies. Prior to that, from February 2000 to October 2002, he served as Chief Operating Officer of AOL Latin America, and prior to that, from October 1996 to February 2000, he served as Regional Vice President for Frito Lay’s Caribbean division. Mr. Benejam has also worked in various positions for Pepsico, including as Pepsico’s President-Latin America. Mr. Benejam has an MBA from Indiana University.

Mario B. Ferrari, a director of ours since 2004, is currently a principal at Royal Palm Capital Partners, a private investment and management firm. Mr. Ferrari is also a director of publicly-held SunAir Services Corporation and Coconut Palm Acquisition Corp. Prior to joining Royal Palm Capital Partners in 2002, he worked as an investment banker with Morgan Stanley & Co. from 2000 to 2002, where he served as a founding member of the Private Equity Placement Group. Previously from 1997 thru 1999, Mr. Ferrari was co-founder of PowerUSA, LLC, a retail energy services company. Mr. Ferrari has a B.S. in Finance and International Business, magna cum laude, from Georgetown University.

Per-Olof Lööf, a director of ours since 2004, was named Chief Executive Officer and director of South Carolina based KEMET Corporation effective April 4, 2005; Mr. Lööf is also a director of Global Options, Inc., a security consulting firm based in New York City. From 2001 to 2004, Mr. Lööf was a Senior Vice President of Tyco Fire and Security, a subsidiary of Tyco International Ltd. From August 1999 to November 2001, Mr. Lööf was President and Chief Executive Officer of Sensormatic Electronics, Inc., a leading company in the electronic security industry. During his tenure, he successfully led the company through a turnaround and managed a successful acquisition of Sensormatic by Tyco International Ltd. From 1995 to June 1999, Mr. Lööf was Senior Vice President of NCR’s Financial Solutions Group, a supplier to the retail financial services industry. From 1994 to 1995, Mr. Lööf was President and Chief Executive Officer of AT&T Istel Co., a European-based provider of integrated computing and communication services. From 1982 to 1994, Mr. Lööf held a variety of management positions with Digital Equipment Corporation, including Vice President of Sales and Marketing for Europe and Vice President, Financial Services Enterprise for Europe. Mr. Lööf holds an MSc degree in economics and business from the Stockholm School of Economics.

P. Rodney Cunningham, a director of ours since February 16, 2006, is involved in real estate development in Florida and in the northeast United States. He has over 30 years experience in the passenger transportation and wireless communications industries. Mr. Cunningham founded Boca Raton Transportation, Inc. in 1978 and continues to serve as its President. He founded Cunningham Communications, Inc. in 1984, and served as President until its assets were sold to Motorola and Nextel in 1998. He co-founded Palm Beach Transportation, Inc. in 1986 and served as its President until it was sold to Coach USA, Inc. in 1999. Mr. Cunningham majored in accounting at Goldey Beacom College and the University of Delaware.

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Donald K. Karnes, a director of ours since October 21, 2005, is currently the Chief Executive Officer (a position he has held since October 2007) and a director (a position he has held since October 2007) of American Residential Services Investment Holdings, LLC, a national provider of cooling, heating and plumbing services. Mr. Karnes also currently serves as a director of Ameripride Services Inc., a uniform rental business. Mr. Karnes has been a member of the board of directors of Ameripride Services since 2003 and has served on its audit committee and nominating committee. From 1996 to 2004, Mr. Karnes served as Group President of TruGreen Companies L.L.C., which included the divisions of TruGreen LawnCare and TruGreen LandCare. Mr. Karnes also served as President of Terminix International Company L.P. from 1996 to 2000. In 1997, Mr. Karnes was named Chief Operating Officer of Terminix International. Prior to holding office with Terminix International and TruGreen Companies, Mr. Karnes was the President and Chief Operating Officer of a division of TruGreen Companies, TruGreen ChemLawn, from 1991 to 1996. During such time, TruGreen Companies acquired ChemLawn and Mr. Karnes led the successful combination and integration of the two companies.

Robert C. Farenhem, has been our Chief Financial Officer since February 2007. Mr. Farenham is a Principal of Royal Palm Capital Management, LLLP. Mr. Farenhem has been a Principal and the Chief Financial Officer of Royal Palm Capital Partners since April 2003 and is a director of Equity Media Holdings Corp. and American Residential Services Investment Holdings, LLC. Between April 18, 2005 and December 20, 2005, Mr. Farenhem was our Interim Chief Financial Officer. Prior to joining Royal Palm Capital, from February 2002 through April 2003, Mr. Farenhem was Executive Vice President of Strategic Planning and Corporate Development for Bancshares of Florida and Chief Financial Officer for Bank of Florida. Bancshares of Florida is a multi-bank holding company that includes Bank of Florida. Previously, Mr. Farenhem was an investment banker with Bank of America Securities from October 1998 to February 2002, advising on mergers and acquisitions, public and private equity, leveraged buyouts and other financings. Mr. Farenhem graduated from the University of Miami, where he received his BBA in Finance.

Ron G. Lakey had been our President and Chief Operating Officer since December 2006. He had been our President of Construction and Materials since January 23, 2006. Prior to his tenure as President of the Construction and Materials divisions, from April 2005 to January 23, 2006, Mr. Lakey was our Vice President – Business Development. Prior to that, from February 2005 to April 2005, he served as our Chief Financial Officer. From February 2004 until January 2005, Mr. Lakey served on the board of directors and as Chief Financial Officer of Alice Ink, Inc., a privately held consumer products company. From July 1987 to August 1997 he served in various financial and operational positions for various ADT Limited subsidiaries, including Chief Operating Officer for its operations in Canada and eleven European countries. Mr. Lakey has over 15 years of experience in the electronic security services industry. Prior to joining Alice Ink, Inc. and following his time at ADT, Mr. Lakey was retired. On April 27, 2007, Mr. Lakey resigned from his position with Devcon.

Our directors hold office until the next annual meeting of our shareholders or until their successors have been duly elected and qualified. Our officers are elected annually by our board of directors and serve at the discretion of the board of directors. There are no arrangements or understandings with respect to the selection of officers or directors.

There are no family relationships between any of our directors and executive officers named above. Donald L. Smith, III, who is listed as a “named executive officer” in this report but is no longer currently employed by us is the son of Donald L. Smith, Jr., a founder, director and former Chairman and Chief Executive Officer of ours. See “Item 11 — Executive Compensation”.

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Information Regarding the Board of Directors and Committees of the Board of Directors and Other Corporate Governance Matters

We operate within a comprehensive plan of corporate governance for the purpose of defining responsibilities, setting high standards of professional and personal conduct and assuring compliance with such responsibilities and standards. We regularly monitor developments in the area of corporate governance. In July 2002, Congress passed the Sarbanes-Oxley Act of 2002, which, among other things, establishes, or provides the basis for, a number of corporate governance standards and disclosure requirements. In addition, Nasdaq has corporate governance and listing requirements which have been approved by the Securities and Exchange Commission. In response to these actions, our board of directors has initiated the below actions consistent with certain of the proposed rules.

Independent Directors

A majority of the members of our board of directors is independent according to the Nasdaq Corporate Governance rules. In particular, our board of directors has in the past evaluated, and our nominating committee will in the future evaluate, periodically the independence of each member of the board of directors.

The committee or board determines whether a director is independent by evaluating, among other factors, the following:

1. Whether the member of the board of directors has any material relationship with us, either directly, or as a partner, shareholder or officer of an organization that has a relationship with us;

2. Whether the member of the board of directors is a current employee of ours or was an employee of ours within three years preceding the date of determination;

3. Whether the member of the board of directors is, or in the three years preceding the date of determination has been, affiliated with or employed by (i) a current internal or external auditor of ours or any affiliate of such auditor or (ii) any former internal or external auditor of ours or any affiliate of such auditor, which performed services for us within three years preceding the date of determination;

4. Whether the member of the board of directors is, or in the three years preceding the date of determination has been, part of an interlocking directorate, in which an executive officer of ours serves on the compensation committee of another company that concurrently employs the member as an executive officer;

5. Whether the member of the board of directors, or any immediate family member of a director, receives any consulting, advisory or other compensatory fee from us, other than payments made in his or her capacity as a member of our board of directors, payments to an immediate family member who is an employee (other than an executive officer) of ours, benefits under a tax-qualified retirement plant or non-discretionary compensation;

6. Whether the member is an executive officer of ours or owns specified amounts of our securities — for purposes of this determination, a member will not lose his or her independent status due to levels of stock ownership as long as the member owns 10% or less of our voting securities or management determines that this member’s ownership above the 10% level does not affect his independence;

7. Whether an immediate family member of the member of the board of directors is a current executive officer of ours or was an executive officer of ours within three years preceding the date of determination;

8. Whether an immediate family member of the member of the board of directors is, or in the three years preceding the date of determination has been, affiliated with or employed in a professional capacity by (i) a current internal or external auditor of ours or any affiliate of ours or (ii) any former internal or external auditor of ours or any affiliate of ours which performed services for it within three years preceding the date of determination; and

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9. Whether an immediate family member of the member of the board of directors is, or in the three years preceding the date of determination has been, part of an interlocking directorate in which an executive officer of ours serves on the compensation committee of another company that concurrently employs the immediate family member of the member of the board of directors as an executive officer.

10. Whether the member of the board of directors, or an immediate family member of the board of directors, is a partner in, or controlling shareholder or executive officer of, any organization to which we made or received from payments for property or services, in the current year or in the past three fiscal years, exceeding the greater of 5% of the recipient’s consolidated gross revenues for that year or $200,000 with the exception of: (i) payments arising solely from investments in our securities; or (ii) payments under non-discretionary charitable contribution matching programs.

The above list is not exhaustive and the committee considers all other factors which could assist it in its determination that a director has no material relationship with us that could compromise that director’s independence.

As a result of this review, our board of directors affirmatively determined that W. Douglas Pitts, Gustavo R. Benejam, Per-Olof Lööf, Donald K. Karnes and Rodney Cunningham are independent of Devcon and our management under the standards set forth above. Donald L. Smith, Jr. and Richard L. Hornsby are considered inside directors because of their previous employment as our senior executives and because of transactions we’ve entered into with Donald L. Smith, Jr. See “Item 13 — Certain Relationships and Related Transactions”. Richard C. Rochon and Mario B. Ferrari are considered non-independent outside directors because of their relationship with Coconut Palm Capital Partners, Ltd., an entity that made an $18 million investment in the Company in July 2004 and received beneficial ownership of approximately 57.6% of the shares of our common stock on a fully-diluted as-converted basis as of such date (approximately 52.4% of the shares of our common stock on a fully-diluted as-converted basis as of March 30, 2007) as a consequence. As a result of this analysis Messrs. Smith, Hornsby, Rochon and Ferrari are precluded from sitting on our audit committee.

Our non-management directors hold meetings separate from management, and intend to continue to hold such meetings at least once a year.

Directors’ Fees

We pay each of our directors an annual retainer for board service of $25,000, except for our former Chairman, Donald L. Smith, Jr., who was paid a $35,000 fee to compensate him for his service as Chairman of our board of directors during a portion of 2006. Members of our audit committee receive an additional annual retainer of $1,000 in June, except for the chairman of that committee whose additional annual retainer equals $5,000. Compensation committee and nominating committee members receive an additional $1,000 annual retainer, except for the chairman of each of these committees who receives an additional $5,000 annual retainer. Non-employee directors also receive attendance fees in an amount equal to $1,000 per in-person or telephonic meeting attended by such directors. Amounts paid to our directors, including the chairmen of the committees of the board of directors, may be increased by action of the board.

A new non-employee director will be granted an option to purchase 8,000 shares of our common stock upon the commencement of service as a director from a stock option plan then in effect. In addition, each non-employee director will be granted options to purchase 5,000 shares of our common stock after each annual meeting. Options are granted at an exercise price equal to the closing market price on the grant date.

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Director Compensation Table

The following director compensation table sets forth, for the fiscal year ended December 31, 2006, the cash and certain other compensation paid or accrued by us to our outside directors.

Name	Fees Earned or Paid in Cash ($) (1)		Stock Awards ($)	Option Awards ($) (2)	Non-Equity Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)		Total ($)
Gustavo R. Benejam	21,250		--	12,885	--	--	--		34,135
James Cast	5,750	(3)	--	2,147	--	--	75,000	(4)	82,897
P. Rodney Cunningham	7,875		--	27,917	--	--	--		35,792
Mario B Ferrari	12,750		--	12,885	--	--	--		25,635
Richard L. Hornsby	11,000		--	12,885	--	--	62,000	(5)	85,885
Donald K. Karnes	14,250		--	27,917	--	--	--		42,167
Per-Olof Loof	20,500		--	12,885	--	--	--		33,385
W. Douglas Pitts	24,250		--	12,885	--	--	--		37,135
Richard C. Rochon	12,750		--	12,885	--	--	--		25,635
Donald L. Smith, Jr.	35,000		--	12,885	--	--	322,956	(6)	370,841

⁽¹⁾ Represents fees paid to the directors during 2006 as members of the board and for their participation on various committees.

⁽²⁾ Represents the grant date expense of stock options to purchase shares of common stock granted in November 2006 at $2.14746 per share, as determined pursuant to FAS 123R.

⁽³⁾ Mr. Cast resigned from our board on January 23, 2006; fees paid are for the period through and including January 23, 2006.

⁽⁴⁾ Represents payments made to Mr. Cast under a separate consulting agreement. See “Item 13 — Certain Relationships and Related Transactions”.

⁽⁵⁾ Represents payments made to Mr. Hornsby under a separate consulting agreement. See “Item 13 — Certain Relationships and Related Transactions”.

⁽⁶⁾ Represents retirement benefits paid to Mr. Smith ($253,800), the value of Mr. Smith’s automobile ($2,013) and interest paid to Mr. Smith by the Company in relation to a related party note totaling $67,143. See “Item 13 — Certain Relationships and Related Transactions”

Board Meetings

During the year ended December 31, 2006, our board of directors held eight meetings and took seven actions by unanimous written consent. During 2006, except for Per-Olof Lööf, no incumbent director attended fewer than 75 percent of the aggregate of (i) the number of meetings of our board of directors held during the period he served on the board and (ii) the number of meetings of committees of the board held during the period he served on such committees. We have no formal policy regarding attendance by our directors at our annual shareholder meetings, although we encourage this attendance and most of our directors have historically attended these meetings. All of our directors attended the 2006 annual shareholder meeting. Our board of directors has three standing committees — the audit committee, the compensation committee and the nominating committee.

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Audit Committee

Our audit committee is comprised of three non-employee members of our board of directors. After reviewing the qualifications of the current members of our audit committee, and any relationships they may have with our company that might affect their independence from Devcon, our board of directors has determined that:

(1) all current committee members are “independent” as that concept is defined in the applicable rules of Nasdaq and the Securities and Exchange Commission,

(2) all current committee members are financially literate, and

(3) Mr. Gustavo R. Benejam qualifies as an “audit committee financial expert” under the applicable rules of the Securities and Exchange Commission. In making the determination as to Mr. Benejam’s status as an audit committee financial expert, our board of directors determined he has accounting and related financial management expertise within the meaning of the aforementioned rules as well as the listing standards of Nasdaq.

Messrs. Pitts, Lööf and Benejam are members of our audit committee. The audit committee held seven meetings and took one action by unanimous written consent during 2006. The duties and responsibilities of the Company’s audit committee include: (a) monitoring the integrity of our financial reporting process and systems of internal controls regarding finance, accounting, legal and regulatory compliance, (b) monitoring the independence and performance of our independent registered public accounting firm and our internal audit functions, (c) providing an avenue of communication between our independent registered public accounting firm and management and (d) having the sole authority to appoint, determine funding for and oversee our external auditors. The audit committee is governed by a charter which we believe conforms to the corporate governance rules issued by the Securities and Exchange Commission and Nasdaq concerning audit committees. This charter is available on our website at www.devc.com. A copy of this charter may be obtained for no cost upon request from our Corporate Secretary. The information contained in our internet website is not incorporated into this annual report.

Berenfeld, Spritzer, Shechter & Sheer, or BSS&S, our independent registered public accounting firm, reports directly to the audit committee. Any allowable work to be performed by BSS&S outside of the scope of the regular audit is pre-approved by the audit committee. The audit committee will not approve any work to be performed that is in violation to the Securities Exchange Act of 1934, as amended.

The audit committee, consistent with the Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, meets with management and our independent registered public accounting firm prior to the filing of officers’ certifications with the SEC to receive information concerning, among other things, significant deficiencies in the design or operation of internal controls.

The audit committee has, through the Code of Ethical Conduct, enabled confidential and anonymous reporting of improper activities directly to the audit committee.

Compensation Committee

Messrs. Pitts, Lööf and Karnes are members of our compensation committee. Mr. James R. Cast was a member of the committee until his resignation from the board on January 23, 2006. Mr. Karnes became a member in April 2006. The compensation committee held six meetings and took one action by unanimous written consent during 2006. This committee administers the 1992 and 1999 stock option plans and our new 2006 incentive compensation plan and has the power and authority to (a) determine the persons to be awarded options and the terms thereof and (b) construe and interpret the 1992 and 1999 stock option plans and the new 2006 incentive compensation plan. This committee is also responsible for the final review and determination of executive compensation.

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All members of the compensation committee are considered independent under Nasdaq’s independence rules. This committee is governed by a charter which is available on our website at www.devc.com. A copy of this charter may be obtained for no cost upon request from our Corporate Secretary. The information contained in our internet website is not incorporated into this annual report.

Nominating Committee and Procedures

Messrs. Benejam, Cunningham and Karnes are the members of our nominating committee. Mr. Cast was a member of the nominating committee until his resignation from the Board on January 23, 2006. Messrs. Cunningham and Karnes became members in April 2006. The nominating committee held no meetings and took one action by unanimous written consent during 2006. The purpose of this committee is to define the basic responsibilities and qualifications of individuals nominated and elected to serve as members of our board of directors, to identify and nominate individuals qualified to become directors in accordance with these policies and guidelines and to oversee the selection and composition of committees of our board of directors. The nominating committee is governed by a charter adopted by Devcon’s board of directors. This charter is available on our website at www.devc.com.

The nominating committee considers candidates for board membership suggested by its members and other board members, as well as management and shareholders. This committee also has the sole authority to retain and to terminate any search firm to be used to assist in identifying candidates to serve as trustees from time to time. A shareholder who wishes to recommend a prospective nominee for the board should notify in writing our Corporate Secretary or any member of our nominating committee, including in such correspondence whatever supporting material the shareholder considers appropriate. The nominating committee also considers whether to nominate any person nominated by a shareholder under the provisions of our bylaws relating to shareholder nominations as described in the section entitled “Information Concerning Shareholder Proposals” in our proxy statement. The nominating committee does not solicit director nominations.

Once the nominating committee has identified a prospective nominee, the committee makes an initial determination as to whether to conduct a full evaluation of the candidate. This initial determination is based on the information provided to the committee with the recommendation of the prospective candidate, as well as the committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional board members to fill vacancies or expand the size of our board and the likelihood that the prospective nominee can satisfy the evaluation factors described below. If the committee determines, in consultation with the Chairman of the Board and other board members as appropriate, that additional consideration is warranted, it may request a third-party search firm to gather additional information about the prospective nominee’s background and experience and to report its findings to the committee. The committee then evaluates the prospective nominee against the standards and qualifications set out by the nominating committee for board membership.

The committee will also consider other relevant factors as it deems appropriate, including the current composition of the board, the balance of management and independent trustees, the need for audit committee expertise and the evaluations of other prospective nominees. In connection with this evaluation, the committee will determine whether to interview the prospective nominee, and if warranted, one or more members of the committee, and others as appropriate, will interview prospective nominees in person or by telephone. After completing this evaluation and interview, the committee will make a recommendation to the full board as to the persons who should be nominated by the board, and the board will determine the nominees after considering the recommendation and report of the committee.

While there are no formal procedures for shareholders to recommend nominations beyond those set forth in the section entitled “Information Concerning Shareholder Proposals” in our proxy statement, Devcon’s board of directors will consider shareholder recommendations. These recommendations should be addressed to the Chairman of our nominating committee who will submit for review these nominations to the independent members of the board of directors.

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All members of our nominating committee are considered independent under Nasdaq’s independence rules. This committee is governed by a charter which is available on our website at www.devc.com. A copy of this charter may be obtained for no cost upon request from Devcon’s Corporate Secretary. The information contained in our internet website is not incorporated into this annual report.

Code of Ethical Conduct

We have adopted a Code of Ethical Conduct that includes provisions ranging from restrictions on gifts to conflicts of interest. All employees are bound by this Code of Ethical Conduct, violations of which may be reported to the audit committee. The Code of Ethical Conduct includes provisions applicable to our senior executive officers, consistent with the Sarbanes-Oxley Act of 2002. This Code of Ethical Conduct is available on our website www.devc.com. Management intends to post on the website amendments to or waivers from our Code of Ethical Conduct. We will provide a copy of this Code of Ethical Conduct to any person without charge upon written request made by such person addressed to Devcon’s Corporate Secretary at Devcon International Corp., 595 S. Federal Highway, Suite 500, Boca Raton, Florida, 33432.

Personal Loans to Executive Officers and Directors

We comply with, and will operate in a manner consistent with, legislation prohibiting extensions of credit in the form of a personal loan to or for our directors and executive officers. For information on arrangements currently have in place, see “Item 13 — Certain Relationships and Related Transactions”.

Communications with Shareholders

We have no formal policy regarding attendance by its directors at annual shareholders’ meetings, although most of our directors have historically attended those meetings. Except for Per-Olof Lööf, all of our directors attended the 2006 Annual Meeting of Shareholders. Anyone who has a concern about Devcon’s or its employees’ conduct, including accounting, internal accounting controls or audit matters, may communicate directly with the Chairman of our board of directors, our non-management directors or the audit committee. Such communications may be confidential or anonymous, and may be e-mailed, submitted in writing or reported by phone to special addresses and a toll-free phone number published on our website at www.devc.com. All such concerns will be forwarded to the appropriate directors for their review, and will be simultaneously reviewed and addressed by our Chief Financial Officer in the same way that other concerns are addressed by management. Our Code of Ethical Conduct prohibits any employee from retaliating or taking any adverse action against anyone for raising or helping to resolve an integrity concern.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10 percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock. Officers, directors and greater than 10 percent shareholders are required by the rules and regulations of the Securities and Exchange Commission to furnish to us copies of all Section 16(a) forms they file.

To management’s knowledge, based solely on review of the copies of these reports furnished and representations that no other reports were required, during the fiscal year ended December 31, 2006, all Section 16(a) filing requirements applicable to the Company’s officers, directors and greater than 10 percent beneficial owners were in compliance, with the exception of Per-Olof Lööf who failed to timely file one Form 4 disclosing one transaction, which failure resulted from administrative oversight.

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Item 11. Executive Compensation

Compensation Discussion and Analysis

The following Compensation Discussion and Analysis, or CD&A, describes the material elements of compensation for the Devcon executive officers identified in the Summary Compensation Table. We refer to these officers as the named executive officers. As more fully described in this CD&A, the Compensation Committee of the Board, or the committee, makes all decisions for the total direct compensation—that is, the base salary, bonus awards, stock options and other equity compensation—of our executive officers, including the named executive officers. The committee’s recommendations for the total direct compensation of our Chief Executive Officer are subject to approval of the Board of Directors.

The day-to-day design and administration of savings, health, welfare and paid time-off plans and policies applicable to salaried U.S.-based employees in general are handled by teams of our Human Resource and Finance employees. The committee (or Board) remains responsible for certain fundamental changes outside the day-to-day requirements necessary to maintain these plans and policies.

Devcon’s Business Environment

We are a leading regional provider of electronic security alarm monitoring services, including monitoring of burglary, fire, medical, environmental, video and CCTV, and security access systems to residential, both single and multi-family homes, financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and healthcare and educational facilities. We also have wholesale customers, where we monitor security systems on behalf of independent security companies. We believe the electronic security systems monitoring industry presents an attractive opportunity for predictable recurring revenues. Our electronic security services division operates primarily in the state of Florida and in the New York City metropolitan area.

We were incorporated in Florida in 1951 as Zinke-Smith, Inc. and adopted our present name in October 1971. Our stock has been publicly traded on the Nasdaq Global Market System since March 1972. Until 2004, our construction and materials divisions were our primary operations. As previously discussed, however, between 2002 and 2004, our management engaged in a review of strategic alternatives to enter into new lines of business that had a prospect of providing predictable, recurring revenue. In April 2005, we began a process of reviewing in detail the operations of our materials and construction divisions, which were incurring operating losses. This strategic review and shift in operational focus resulted in a series of acquisitions and divestitures which together allowed us to pursue our objective of divesting ourselves of our construction and materials divisions and becoming a large regional provider of electronic security services. These acquisitions and divestitures are described in detail elsewhere in this annual report.

Compensation Program Objectives and Rewards

Devcon’s compensation and benefits programs are driven by Devcon’s business environment and are designed to enable us to achieve our strategic goals. The programs’ objectives are to:

• Reflect Devcon’s position as an emerging leader in the Southeast and New York metro area for providing electronic security services;

• Enable Devcon to fulfill its strategic goals of becoming a “pure play” electronic security services company with the orderly divestiture of its construction and materials divisions, as well as the completion of acquisitions sufficient to create a platform on which Devcon may build its electronic security services division;

• Grow this platform organically by leveraging the customer relationships obtained via these various acquisitions;

• Ensure Devcon has ready access to the capital markets and other financing avenues to obtain funds to implement its strategic planning;

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• Attract, engage and retain the workforce to promote growth and ensure our future success;

• Motivate and inspire employee behavior that fosters a high-performance culture;

• Support a one-company culture as well as a lean and flexible business model;

• Support overall business objectives; and

• Create a management structure that creates the best opportunity to provide shareholders with a superior rate of return.

Consequently, the guiding principles of our programs are:

• Enabling a high-performance organization;

• Competitiveness in the marketplace in which we compete for talent;

• Optimization of cost to our company and value to employees; and

• Company-wide consistency with business-driven flexibility.

To this end, we will measure success of our programs by:

• Overall business performance and employee engagement;

• Ability to attract and retain key talent;

• Costs and business risks that are limited to levels that optimize risk and return; and

• Employee understanding and perceptions that ensure program value equals or exceeds program cost.

All of Devcon’s compensation and benefits for its named executive officers described below have as a primary purpose our need to attract, retain and motivate the highly talented individuals who will engage in the behaviors necessary to enable us to implement and accomplish each of the strategic goals described above while upholding our values in a highly competitive marketplace. Beyond that, different elements are designed to engender different behaviors.

• Base salary and benefits are designed to attract and retain employees over time.

• Long-Term Incentives—stock options and other equity compensation under our shareholder-approved incentive compensation plans—focus executives’ efforts on the behaviors within the recipients’ control that they believe are necessary to ensure our long-term success, as reflected in increases to our stock prices, growth in our earnings per share and other elements.

• Annual cash bonuses, which are individually designed to address business needs related to attracting and retaining employees and to provide incentives to achieve the short-term goals our management and board of directors establish for the one year period in question.

• Severance and change in control provisions are designed to facilitate our ability to attract and retain executives as we compete for talented employees in a marketplace where such protections are commonly offered.

The Elements of Devcon’s Compensation Program

Each of the named executive officers was party to an employment agreement, or in the case of Mr. Hare, an employment offer letter, with our company, which set forth the base salary for the respective named executive officer, subject to adjustment by the committee and the Board. The agreements stipulated an annual base salary with merit increases and bonuses as determined by the committee. The initial base salary under each of these employment agreements was based upon determinations representing multiple factors, including to some extent in certain cases:

a) the base salary being earned by the executive at his last place of employ;

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b) salaries paid to executives at comparable companies;

c) individual negotiations between the company and the executive; and

d) appropriate adjustments made to take into account the growing nature of our company.

Base Salary

Executive officer base salaries are based on job responsibilities and individual contribution, with reference to base salary levels of executives at comparable companies, based upon a combination of both size/market capitalization, geographical location and industry.

In February 2006, the committee determined to leave Mr. Ruzika’s annual base salary at the $325,000 provided for in his employment agreement since 2004. The committee made this determination after reviewing his compensation history, our results in 2005, and growth expectations going-forward. The committee determined it would be in the best interests of our shareholders to refrain from effecting an increase in Mr. Ruzika’s salary until these growth expectations were further realized. The final determination, after reviewing these factors, was subjective. The committee also examined the market data for chief executive officers of the peer companies discussed in the paragraph below.

Base salaries for individual executive officers are informally compared by our compensation committee to various companies within the electronic security services industry, as well as companies of similar size/market capitalization and growth strategies as those currently being employed by Devcon. These peer groups were based on the committee’s general knowledge of the industry and other companies of similar size/market capitalization to our company as well as guidance from certain other advisors. No independent consulting firm was retained to conduct these reviews. Given the level of our executive officers’ compensation, our compensation committee did not believe that it was necessary to incur the expense of formal studies or market analysis. In general, we target base salaries for executive officers, including our chief executive officer, at the 50^th percentile compared to the peer companies we examined.

The committee determines base salaries for other executive officers, including the named executive officers, towards the end of every year. Our chief executive officer proposed new base salary amounts based on:

• his evaluation of individual performance and expected future contributions;

• job level, individual performance and overall company performance (including our historic and projected performance, sales, earnings, financial condition and return on equity and economic conditions);

• a review of the survey data discussed above to ensure competitive compensation against the external market generally defined as the peer companies;

• our chief executive officer’s own intimate knowledge of the electronic security services industry having had over 20 years of experience in the industry; and

• comparison of the base salaries of the executive officers who report directly to the chief executive officer to ensure internal equity.

Mr. Ruzika recommended, and the committee approved, base salary increases ranging from 7% to 11% for the named executive officers.

Base salaries paid to executive officers are deductible for federal income tax purposes except to the extent that the executive is a covered employee under Section 162(m) of the Internal Revenue Code — generally, the named executive officers from year to year—the executive’s aggregate compensation which is subject to Section 162(m) exceeds $1 million. No employee received base salary in excess of $1 million in 2006.

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Base salary and bonus payments are the only elements of compensation that are used in determining the amount of contributions permitted under our 401(k) Plan.

Bonus Awards

In January 2006, upon recommendation by Mr. Ruzika and approval of the committee and Board of Directors, we paid to Mr. Lakey a $100,000 cash bonus in consideration of the significant efforts made by him to restructure our construction and materials divisions into what we anticipated would become profitable enterprises. In the fourth quarter of 2006, Mr. Ruzika recommended further bonuses for certain lower level officers, as well as Messrs. Lakey and Hare. The committee and Board of Directors adopted Mr. Ruzika’s recommendations with respect to the lower level officers in recognition of the efforts those officers had made in ramping up Devcon’s platform of electronic security services companies, but reduced Mr. Ruzika’s recommended bonus amounts with respect to Messrs Lakey and Hare due to the committee’s belief that Mr. Lakey had received a significant reward and incentive via his January bonus and the committee’s belief that the metrics achieved by us during 2006 did not justify the bonus levels being recommended by Mr. Ruzika. Messrs. Lakey and Hare elected not to accept such bonuses. Based upon 2005 performance, no bonuses were paid to any other named executive officer of Devcon, including Mr. Ruzika.

In addition, in the first quarter of 2007, we paid each of Messrs. Ruzika, Hare and Lakey certain severance or consulting payments in connection with their separation from the Company. See “Separation, Consulting and Change in Control Arrangements” below. These payments were negotiated amounts determined by management to be necessary to retain certain covenants (e.g., noncompete, nonsolicit, nondisparagement, confidentiality, etc.) and to help obtain releases from liability and obligations that management felt were useful to helping Devcon continue the pace of its growth efforts. In addition, each agreement contained an agreement from the executive to continue to provide certain consulting services to Devcon for a period after termination of the executive’s employment. We believe these consulting arrangements will allow for a smoother transition, providing less disruption to Devcon’s main focus and the achievement of its strategic goals.

Long-Term Incentive Plan

Our 2006 Incentive Compensation Plan provides for the granting of long-term incentive awards; however, to date, we have not granted any such long-term incentive awards. In late 2006, the committee began researching the desirability of implementing such a plan to more appropriately align the interests of our executive officers with our long-term success. We are currently examining the feasibility of implementing such a plan.

Stock Options

In December 2005, we approved, and recommended to our board of directors for adoption, the Devcon International Corp. 2006 Incentive Compensation Plan which provides for grants of stock options, stock appreciation rights, restricted stock, deferred stock, other stock-related awards and performance awards that may be settled in cash, stock or other property. In September 2006, the Devcon International Corp. 2006 Incentive Compensation Plan was approved by our shareholders. We adopted this new equity compensation plan for two reasons: a) no awards were available for grant under our previously adopted equity compensation plans and b) we believed the wide variety of awards authorized under this new plan gave us greater flexibility in terms of how to structure our employees’ compensation allowing for a greater tailoring of compensation to our company’s and the individual employee’s situation. In addition, our board of directors felt equity incentives were particularly important at this stage of Devcon’s growth given its recent entry into a completely new industry and its need for dedicated employees who possessed the knowledge and experience within the electronic security services industry to ensure Devcon’s success in it.

Stock options provide for financial gain derived from the potential appreciation in stock price from the date that the option is granted until the date that the option is exercised. The exercise price of stock option grants is set at fair market value on grant date. Under our shareholder-approved equity compensation plans, we may not grant stock options at a discount to fair market value or reduce the exercise price of outstanding stock options, except in the case of a stock split or other similar event. We do not grant stock options with a so-called “reload” feature, nor do we generally loan funds to employees to enable them to exercise stock options. Our long-term performance ultimately determines the value of stock options, because gains from stock option exercises are entirely dependent on the long-term appreciation of our stock price. The stock options granted by the committee are generally exercisable in equal installments on the first through third anniversaries of the grant date and expire ten years from the grant date.

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Because a financial gain from stock options is only possible after the price of Devcon common stock has increased, we believe grants encourage executives and other employees to focus on behaviors and initiatives that should lead to an increase in the price of Devcon common stock, which benefits all Devcon shareholders.

No Backdating or Spring Loading: Devcon does not backdate options or grant options retroactively. On November 10, 2006, we granted options to purchase an aggregate of 230,000 shares of our common stock to various officers and employees, which options represented options we were unable to grant previously due to a lack of availability under previously existing equity compensation plans; however, these grants were still made at the fair market value on the grant date. In addition, we do not plan to coordinate grants of options so that they are made before announcement of favorable information, or after announcement of unfavorable information. Devcon’s options are granted at fair market value on a fixed date or event, with all required approvals obtained in advance of or on the actual grant date. All grants to executive officers require the approval of the committee. The timing of such grants is at the discretion of the committee; however, traditionally, initial grants of options occur at the date of initial employment.

Fair market value has been consistently determined as the closing price on the grant date. In order to ensure that its exercise price fairly reflects all material information—without regard to whether the information seems positive or negative—every grant of options is contingent upon a determination by the committee that Devcon is not in possession of material undisclosed information. If we are in possession of such information, grants are suspended until the second business day after public dissemination of the information.

Grants are generally made to the named executive officers as part of an annual process. In November 2006, annual grants of options described in the Summary Compensation Table were made by the committee to the named executive officers. The stock option grants vest in equal installments on the first through third anniversaries of the grant date and expire in ten years from the grant date. In addition, pursuant to the terms of a letter agreement between Devcon and James Cast, a former director of ours, on November 10, 2006, Devcon granted options to purchase 1,000 shares of Devcon common stock at an exercise price equal to $5.51 per share. This stock option grant was immediately vested and expires ten years from the grant date.

Stock Ownership Guidelines

Although we encourage members of our senior management to hold positions in our common stock, we do not currently have requirements in place to this effect. Notwithstanding the lack of requirements, as disclosed in this annual report, our Acting Chief Executive Officer, Richard C. Rochon, beneficially owns, via direct ownership and control over RPCP Investments LLLP, 83,333 shares of our common stock (1,530,666 shares when taking into account immediately exercisable warrants and options which are beneficially held by Mr. Rochon and RPCP), further aligning his interests with those of our shareholders. See “New Executive Officers; Royal Palm Management Agreement” below.

Derivatives Trading. We grant stock-based incentives in order to align the interests of Devcon’s employees with those of its shareholders. Accordingly, we strongly discourage executive officers from buying or selling derivative securities related to Devcon common stock such as puts or calls on Devcon common stock since such securities may diminish the alignment that we are trying to foster. Company-issued options are not transferable during the executive’s life, other than certain gifts to family members (or trusts, partnerships, etc. that benefit family members).

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Return of Incentive Compensation by an Executive. The committee has not adopted formal policies to address the possibility that incentive compensation may be provided to certain executives, including named executive officers, based on financial results that may become the subject of a significant restatement. We anticipate, in the case of a significant restatement of financial results caused by executive fraud or willful misconduct, the Board will require the return of such incentive compensation in accordance with and to the extent required by applicable law.

Benefits

As salaried, U.S.-based employees, the named executive officers participate in a variety of retirement, health and welfare, and paid time-off benefits designed to enable us to attract and retain our workforce in a competitive marketplace. Health and welfare and paid time-off benefits help ensure that we have a productive and focused workforce through reliable and competitive health and other benefits. Savings plans help employees, especially long-service employees, save and prepare financially for retirement.

Devcon’s qualified 401(k) Plans allow highly compensated employees to contribute up to 60 percent of their compensation (base salary plus bonus payments), up to the limits imposed by the Internal Revenue Code—$15,500 for 2007 (excluding any Catch-Up contributions, as allowed by the Internal Revenue Code)—on a pre-tax basis. We provide matching contributions between three percent and four percent of employee contributions, which vest over a five year period. Participants choose to invest their account balances from an array of investment options as selected by plan fiduciaries from time to time. The 401(k) Plans are designed to provide for distributions in a lump sum or in periodic installments after termination of service. However, loans—and in-service distributions under certain circumstances such as a hardship, attainment of age 59 1/2 or a disability—are permitted.

We do not currently have in place any form of pension plan in which any of our executive officers participate.

Perquisites

Given its status as an emerging player within its industry and the necessity of carefully marshaling cash flows to achieve its strategic goals, Devcon generally provides only a very limited slate of perquisites to its senior management employees, including the named executive officers. To the extent offered by Devcon, the primary purpose of perquisites is our desire to minimize distractions from the executives’ attention to important Devcon initiatives. An item is not a perquisite if it is integrally and directly related to the performance of the executive’s duties. An item is a perquisite if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of our company, unless it is generally available on a non-discriminatory basis to all employees. Certain perquisites have been in place for many years and generally were not reviewed by members of this committee.

We provided the following perquisites during 2006, all of which are quantified in the Summary Compensation Table:

• Automobile allowances are provided to certain senior management. The total monthly expense incurred with respect to the associated lease payments or other allowance is a function of the executive’s position within our company and can include payments for the automobile, insurance and gas. For leases, we calculate the executive’s personal use value of the automobile and include that portion of the total in the executive’s reportable taxable compensation. The taxable compensation is then grossed up to cover the executive’s taxes on such amount. In other situations, we provide a direct allowance to the executive through our normal payroll cycles. All of the allowance is included in the executive’s taxable compensation. We believe that this benefit allows executives to devote additional time to Devcon’s business.

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• Although substantially all of his duties were conducted in our corporate headquarters in Boca Raton, Florida, Mr. Hare resides in Roswell, Georgia. Accordingly, during 2006, we paid the rent and other related expenses on a corporate apartment for Mr. Hare totaling $27,953.45. We also reimbursed Mr. Hare for his travel expenses to return home to Atlanta periodically. These travel-related payments equaled $10,179.52 in 2006. In addition, Mr. Hare received a monthly allowance toward a golf club membership fee. The total paid to Mr. Hare in 2006 in connection with this club membership was $5,400. We believed providing these benefits were necessary to induce Mr. Hare to provide his services to us notwithstanding his domicile being in a different state. These benefits generally were taxable to Mr. Hare.

We do not generally provide the named executive officers with other perquisites such as reimbursement for legal, counseling for personal matters or tax reimbursement payments. We do not provide loans to executive officers.

Separation, Consulting and Change in Control Arrangements

The named executive officers may be eligible for certain benefits and payments if employment terminates under certain circumstances, as described under “Employment Agreements” below.

Severance Benefits. The Severance Program covers regular full- and part-time non-unionized U.S. employees whose employment is terminated by us due to reorganization or reduction in workforce. The Severance Program provides severance payments and other benefits in an amount we believe is appropriate, taking into account the time it is expected to take a separated employee to find another job. The payments and other benefits are provided because we consider the triggering events to be company-initiated terminations of employment that under different circumstances would not have occurred and which is beyond the control of a terminated employee. Severance benefits are intended to ease the consequences to an employee of an unexpected termination of employment. We benefit by requiring a general release from separated employees. In addition, we may request non-compete and non-solicitation provisions in connection with individual separation agreements.

We consider it likely that it will take more time for higher-level employees to find new employment, and therefore senior management generally are paid severance for a longer period. The Severance Program also may provide an amount measured by previous annual bonuses to recognize the separated employee’s efforts undertaken during the time he or she was employed by us. It also may provide different levels of protection from a health and welfare benefit perspective, taking into account a person’s age and service, and also whether or not he or she is then eligible to retire. Additional payments may be permitted in some circumstances as a result of negotiations with executives, especially where we desire particular nondisparagement, cooperation with litigation, noncompetition and nonsolicitation terms and releases.

For example, as previously disclosed and discussed below, on January 22, 2007, Mr. Ruzika resigned from his position as our Chief Executive Officer. On January 26, 2007, we entered into an Advisory Services Agreement with Mr. Ruzika, which became effective on January 22, 2007, and outlined the terms of his separation as well as a consulting arrangement under which Mr. Ruzika would remain involved with us in an advisory capacity. Under the terms of this Advisory Services Agreement, effective as of January 22, 2007, the Amended and Restated Employment Agreement, dated as of June 7, 2004, by and between Mr. Ruzika and Devcon terminated and Mr. Ruzika resigned all of his positions as an officer of Devcon and as an officer and director, as applicable, of each of Devcon’s affiliates. Mr. Ruzika will be paid salary earned and reasonable expenses reimbursable under the Employment Agreement incurred through January 22, 2007, which amounts we estimated equaled $19,515 and an amount equal to $10,416.67 per month for a term of one year under the Advisory Services Agreement. In addition, to the extent permitted under our welfare benefit plans, Mr. Ruzika will remain a participant until the Advisory Services Agreement terminates. At the end of such term, the Advisory Services Agreement shall be automatically renewed on a month to month basis unless terminated by either us or Mr. Ruzika upon sixty (60) days notice. The Advisory Services Agreement includes a release by each of us and Mr. Ruzika of claims that either party may have against the other in respect of Mr. Ruzika’s employment or the termination of such employment, as well as covenants relating to non-competition or non-solicitation of employees by Mr. Ruzika, protection of our proprietary and confidential information, non-disparagement by each of Mr. Ruzika and Devcon and other matters. We anticipate taking a charge of $23,287.67 in connection with the Advisory Services Agreement in the first quarter of 2007.

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Also, as previously disclosed and discussed below, on February 9, 2007, Mr. Hare resigned from all positions held by him with us and our subsidiaries, including as Chief Financial Officer of Devcon. On February 14, 2007, we entered into a Separation Agreement with Mr. Hare outlining the terms of his separation from Devcon as well as a consulting arrangement pursuant to which Mr. Hare would be available to us in a consulting capacity. Under the terms of the Separation Agreement, the Employment Letter issued as of November 28, 2005 to Mr. Hare by Devcon terminated, effective as of February 9, 2007, and Mr. Hare resigned all of his positions as an officer of ours and as an officer and director, as applicable, of each of our affiliates. Under the terms of the Separation Agreement, Mr. Hare will be paid salary earned and reasonable expenses reimbursable under the Employment Letter incurred through February 14, 2007, which amounts we estimated equaled $8,332.90 and an aggregate amount equal to $100,000 payable in installments the timing of which shall be monthly over a six month period. In addition, we agreed to assume Mr. Hare’s obligations under his apartment lease, the lease payments under which are anticipated to equal no more than $2,000 per month with a remaining term of ten months. The Separation Agreement includes a release by each of Devcon and Mr. Hare of claims that either party may have against the other in respect of Mr. Hare’s employment or the termination of such employment, as well as covenants relating to non-competition or non-solicitation of employees by Mr. Hare, protection of our proprietary and confidential information, non-disparagement by Mr. Hare and other matters. We anticipate taking a charge of $111,332.90 in connection with the Separation Agreement in the first quarter of 2007.

In June 2000, we entered into an amended Life Insurance and Salary Continuation Agreement with Donald L. Smith, Jr., our former Chairman, Chief Executive Officer and President. Mr. Smith will receive a retirement benefit upon the sooner of his retirement from his position after March 31, 2003, or a change in control of Devcon. Benefits to be received will equal 75 percent of his base salary and will continue for the remainder of his life. In the event that a spouse survives him, then the surviving spouse will receive a benefit equal to 100 percent of his base salary for the shorter of five years or the remainder of the surviving spouse’s life. Mr. Donald L. Smith, Jr. retired in 2005 and we recognized in 2005 the net present value of the retirement obligation based on Mr. Smith’s then current salary of $338,400 per annum. During 2006, Mr. Smith received $253,800 in retirement payments under this agreement.

Change in Control. The employment agreements to which the named executive officers are party generally have change of control severance provisions. These provisions represent the Board’s recognition of the importance to Devcon and its shareholders of avoiding the distraction and loss of key management personnel that may occur in connection with rumored or actual fundamental corporate changes. We believe properly crafted change in control provisions protect shareholder interests by enhancing employee focus during rumored or actual change in control activity through:

• Incentives to remain with company despite uncertainties while a transaction is under consideration or pending;

• Assurance of severance and benefits for terminated employees; and

• Access to equity components of total compensation after a change in control.

Devcon’s stock options generally vest upon a change in control. The remainder of benefits generally requires a change in control, followed by a termination of an executive’s employment. In adopting the so-called “single” trigger treatment for equity vehicles, we were guided by three principles:

• Be consistent with current market practice among peers. Most if not all of the peer companies we evaluated had change in control protection providing for single trigger equity vesting.

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• Keep employees relatively whole for a reasonable period but avoid creating a “windfall.”

• Single trigger vesting ensures that ongoing employees are treated the same as terminated employees with respect to outstanding equity grants.

• Single trigger vesting provides employees with the same opportunities as shareholders, who are free to sell their equity at the time of the change in control event and thereby realize the value created at the time of the deal.

• The company that made the original equity grant will no longer exist after a change in control and employees should not be required to have the fate of their outstanding equity tied to the new company’s future success.

• Single trigger vesting on performance-contingent equity, in particular, is appropriate given the difficulty of replicating the underlying performance goals.

• Support the compelling business need to retain key employees during uncertain times.

• A single trigger on equity vesting can be a powerful retention device during change in control discussions, especially for more senior executives where equity represents a significant portion of their total pay package. A double trigger on equity provides no certainty of what will happen when the transaction closes.

Donald L. Smith, III’s employment agreement provided that, if the agreement was terminated by us without cause or terminated by the employee for “Good Reason”, which included assignment of duties inconsistent with the executive’s position, then we would pay one year’s salary in severance. If we had experienced a change in control, which included a change of the majority of our board of directors not approved by the incumbent board, or members of Donald L. Smith, Jr.’s family controlling less than 20% of our shares, we would have been obligated to pay two years’ annual compensation upon termination of the agreement by either party. On March 8, 2006, we elected not to renew Mr. Smith’s employment agreement without cause. After certain mutually-agreed to extensions, Mr. Smith ceased to be our employee as of August 31, 2006. Mr. Smith is being paid one year’s salary in severance payments in connection with the termination of his employment with us.

Mr. Ruzika’s employment agreement provided that, if we terminated the agreement (which includes failing to renew the agreement after its initial three year term) without cause, Mr. Ruzika terminated the agreement with cause or Mr. Ruzika failed to renew the agreement, we were required to pay Mr. Ruzika severance payments at the rate of his salary in effect on the date of termination for two years, payable in accordance with our usual payroll schedule. If Mr. Ruzika terminated his employment with us within one year of a change in control with cause, he would be entitled to the two years of severance payments described above. However, no transaction would be considered to be a change in control for purposes of triggering these severance obligations if the transaction in question involved the security services industry or if procured by Mr. Ruzika, Richard C. Rochon, Mario B. Ferrari, Coconut Palm Capital Partners, Ltd. or any affiliate of theirs.

Mr. Lakey’s employment agreement provided that, if within one year of a change of control, Mr. Lakey’s employment was terminated by us without cause or Mr. Lakey terminated his employment voluntarily, he would receive a lump sum payment equal to the sum of his current annual base salary and his average bonus and other average compensation during the last two years. The Employment Agreement defines a “Change of Control” as (i) our selling or transferring substantially all of our assets or (ii) any consolidation or merger or other business combination involving us where our shareholders would not, immediately after such business combination, beneficially own, directly or indirectly, shares representing fifty percent (50%) of the combined voting power of the surviving entity.

None of these employment agreements are in effect any longer because, as described above and below, Mr. Ruzika resigned from his position with Devcon, Mr. Smith’s employment was terminated and Mr. Lakey’s employment agreement expired by its own terms on January 31, 2007.

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We agreed to provide gross-ups for the named executive officers from any taxes due under Section 4999 of the Internal Revenue Code. The effects of Section 4999 generally are unpredictable and can have widely divergent and unexpected effects based on an executive’s personal compensation history. Therefore, to provide an equal level of benefit across individuals without regard to the effect of the excise tax, we determined that 4999 gross up payments were appropriate for our most senior level executives.

New Executive Officers; Royal Palm Management Agreement

As previously disclosed, on January 22, 2007, Stephen J. Ruzika resigned from his position as our chief executive officer. On January 22, 2007, our Board of Directors appointed Richard C. Rochon, our Chairman of the Board, to the position of Acting Chief Executive Officer. As Acting Chief Executive Officer, Mr. Rochon is expected to conduct Devcon’s business in a manner commensurate with the position of Chief Executive Officer in accordance with our Bylaws. Mr. Rochon has been our Chairman since January 24, 2006 and a director of ours since 2004. Mr. Rochon is currently Chairman and Chief Executive Officer of Royal Palm Capital Partners, a private investment and management firm and a principal of Royal Palm Capital Management, LLLP, an affiliate of Royal Palm Capital Partners. We had previously entered into a Management Services Agreement with Royal Palm Capital Management on August 12, 2005 pursuant to the terms of which Royal Palm Capital Management would provide us with certain management services. Royal Palm Capital Management is an affiliate of Coconut Palm Capital Investors I Ltd. with whom we completed a transaction on July 31, 2004, whereby Coconut Palm invested $18 million in our company for the purpose of our entrance into the electronic security services industry. Mario Ferrari, one of our other directors, is also a principal of Coconut Palm and Royal Palm.

Also, as previously disclosed, on February 9, 2007, George M. Hare resigned from all positions held by him with us and our subsidiaries, including as our Chief Financial Officer. On February 13, 2007, our Board of Directors appointed Robert C. Farenhem, a principal of Royal Palm Capital Management to the position of our Chief Financial Officer.

Except for the Management Services Agreement with Royal Palm Capital Management described above, neither Mr. Farenhem nor Mr. Rochon have employment, severance or any other type of agreement with Devcon. Mr. Rochon and Mr. Farenhem do not currently collect a salary in connection with their roles as Acting Chief Executive Officer and Chief Financial Officer.

Compensation Committee Report

The Compensation Committee, comprised of independent directors, reviewed and discussed the above Compensation Discussion and Analysis (CD&A) with our management. Based on the review and discussions, the Compensation Committee recommended to our board of directors that the CD&A be included in this annual report.

Compensation Committee
Per-Olof Lööf (Chairperson)
W. Douglas Pitts	Donald K. Karnes

Summary Compensation Table

The following table sets forth, for the year ended December 31, 2006, the aggregate compensation awarded to, earned by or paid to: (i) Stephen J. Ruzika, our former Chief Executive Officer and President; (ii) Ron Lakey, our former President and Chief Operating Officer; (iii) George M. Hare, our former Chief Financial Officer; and (iv) Donald L. Smith III, our former Vice President –

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Construction Division. We refer to these executive officers and former executive officers as our named executive officers. We did not grant any stock appreciation rights or make any long-term incentive plan payouts during the year. With the exception of Donald L. Smith III whose employment was terminated in 2006, the employment of each of the named executive officers was terminated during the first quarter of 2007. As discussed in this annual report, during the first quarter of 2007, the board of directors appointed Richard C. Rochon to serve as Acting Chief Executive Officer and Robert C. Farenhem to serve as Chief Financial Officer. Neither individual was an officer of or received compensation as an officer of Devcon in 2006.

Name and Principal Position	Year	Salary ($)	Bonus ($)(1)	Stock Awards ($)	Option Awards ($)(2)	Non-Equity Incentive Plan Compen- sation ($)	Change in Pension Value and Nonquali- fied Deferred Compensa- tion Earnings ($)	All Other Compen- sation ($)		Total ($)
George M. Hare, Former Chief Financial Officer	2006	200,000	—	—	107,373	—	—	45,149	(3)	351,057
Ron G. Lakey, Former Chief Operating Officer and President – Construction & Materials	2006	214,423	100,000	—	128,848	—	—	17,684	(4)	460,955
Stephen J. Ruzika, Former Chief Executive Officer and President	2006	325,000	—	—	53,687	—	—	16,234	(5)	394,921
Donald L. Smith III, Former Vice President – Construction Division	2006	116,769	—	—	—	—	—	68,616	(6)	185,385

⁽¹⁾ Represents discretionary bonuses paid to the named executive officers during the year 2006. See “Compensation Discussion and Analysis”.

⁽²⁾ Represents the grant date expense of stock options to purchase shares of common stock granted in November 2006 at $2.14746 per share, as determined pursuant to FAS 123R.

⁽³⁾ Represents amounts paid on behalf of Mr. Hare in relation to his automobile ($5,154), club memberships ($5,400), apartment rental ($18,843), utilities and furniture rental ($5,572) and non-business related air travel ($10,180).

⁽⁴⁾ Represents amounts paid on behalf of Mr. Lakey in relation to his family’s medical and dental benefits ($4,584) as well as the employer matching portion paid with relation to Mr. Lakey’s 401(k) contributions ($5,300). Additionally, Mr. Lakey was paid an auto allowance of $7,800.

⁽⁵⁾ Represents amounts paid on behalf of Mr. Ruzika in relation to his and his family’s medical and dental benefits ($5,434). Additionally, Mr. Ruzika was paid an auto allowance of $10,800.

⁽⁶⁾ Represents amounts paid on behalf of Mr. Smith in relation to his family’s medical and dental benefits ($5,434) as well as the employer matching portion paid with relation to Mr. Smith’s 401(k) contributions ($6,085). Additionally, Mr. Smith was paid an auto allowance of $8,866. With the non-renewal of Mr. Smith’s Employment Agreement, he was also paid negotiated severance payments of $48,231 during the year.

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Grants of Plan-Based Awards Table

The following Grants of Plan-Based Awards Table sets forth by individual grant, the equity and non-equity awards granted to the named executive officers for the fiscal year ended December 31, 2006.

Name	Grant Date	Estimated Future Payouts Under Non-Equity Incentive Plan Awards			Estimated Future Payouts Under Equity Incentive Plan Awards	All Other Stock Awards: Number of Shares of Stock or Units (#)	All Other Option Awards: Number of Securities Under- lying Options (#)	Exercise or Base Price of Option Awards ($/Sh)		Grant Date Fair Value of Stock and Option Awards
		Thresh- old ($)	Target ($)	Maxi-mum ($)	Target (#)
George M. Hare, Former Chief Financial Officer	11/2006	n/a	n/a	n/a	n/a	n/a	50,000	$	5.51	107,373
Ron G. Lakey, Former Chief Operating Officer and President – Construction & Materials	11/2006	n/a	n/a	n/a	n/a	n/a	60,000		5.51	128,848
Stephen J. Ruzika, Former Chief Executive Officer and President	11/2006	n/a	n/a	n/a	n/a	n/a	25,000		5.51	53,687
Donald L. Smith III, Former Vice President – Construction Division	11/2006	n/a	n/a	n/a	n/a	n/a	n/a		n/a	—

Option Exercises and Stock Vested

The following table sets forth certain information concerning the exercise of stock options by the named executive officers during the fiscal year ended December 31, 2006. No stock appreciation rights were granted or are outstanding. No stock options were exercised by any of the named executive officers during 2006. From January 1, 2007 through March 30, 2007, Mr. Don Smith III has exercised all but 450 of his options.

	Option Awards
Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)
George M. Hare, Former Chief Financial Officer	—	—
Ron G. Lakey, Former Chief Operating Officer and President – Construction & Materials	—	—
Stephen J. Ruzika, Former Chief Executive Officer and President	—	—
Donald L. Smith III, Former Vice President – Construction Division	—	—

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Employment Agreements

In June 2000, we entered into an amended Life Insurance and Salary Continuation Agreement with Donald L. Smith, Jr., our former Chairman, Chief Executive Officer and President. Mr. Smith will receive a retirement benefit upon the sooner of his retirement from his position after March 31, 2003, or a change in control of Devcon. Benefits to be received will equal 75 percent of his base salary and will continue for the remainder of his life. In the event that a spouse survives him, then the surviving spouse will receive a benefit equal to 100 percent of his base salary for the shorter of five years or the remainder of the surviving spouse’s life. Mr. Donald L. Smith, Jr. retired in 2005 and we recognized the net present value of the retirement obligation based on Mr. Smith’s then current salary of $338,400 per annum. During 2006, Mr. Smith received $253,800 in retirement payments under this agreement.

In June 2001, we entered into employment agreements with Donald L. Smith, III. The term of each agreement was one year, annually renewable for additional equivalent terms. The agreements stipulated an annual base salary with merit increases and bonuses as determined by the Compensation Committee. If the agreement was terminated by us without cause or terminated by the employee for “Good Reason”, which includes assignment of duties inconsistent with Mr. Smith III’s position, then we would have been obligated to pay one year’s salary in severance. If we had a change in control, which included a change of the majority of our board of directors not approved by the incumbent board, or members of Donald L. Smith, Jr.’s family controlling less than 20% of our shares, we would have been obligated to pay two years’ annual compensation upon termination of the agreement by either party. We agreed to reimburse Mr. Smith III any excise tax payable by Mr. Smith III. Under certain conditions, during employment and for a period of two years after termination, Mr. Smith III agreed not to compete with our business. During 2006 we exercised our option not to renew Mr. Donald Smith III’s contract with its stated terms.

In June 2004, we entered into an employment agreement with Mr. Stephen J. Ruzika, effective April 2, 2004. Under the terms of Mr. Ruzika’s employment agreement, we agreed to pay Mr. Ruzika an annual salary equal to $325,000 plus any bonuses which the compensation committee of our board of directors determined to pay him in its sole discretion. In addition to this salary, Mr. Ruzika was entitled to participate in any bonus plan, incentive compensation program or incentive stock option plan or other employee benefits we provided to our other similarly situated executives, on the terms and at the level of participation determined by our compensation committee. In addition, Mr. Ruzika was granted 50,000 options with an exercise price of $9.00 per share upon the effectiveness of the employment agreement. Any options granted under these plans vested in equal annual installments from the grant date until the expiration date under the employment agreement. The employment agreement had a term of three years; however, this term could be extended by the parties in writing in a separate instrument. Either Mr. Ruzika or our company could terminate the employment agreement for any reason upon sixty (60) days prior written notice to the other. However, if we terminated the agreement (which includes failing to renew the agreement after the initial three years) without cause, Mr. Ruzika terminated the agreement with cause or Mr. Ruzika failed to renew the agreement, we were required to pay Mr. Ruzika severance payments at the rate of his salary in effect on the date of termination for two years, payable in accordance with our usual payroll schedule. In the event of specified changes in control of us, all options previously granted to Mr. Ruzika would automatically vest and if Mr. Ruzika terminated his employment with us within one year of this change in control with cause, he would be entitled to the two years of severance payments described above. However, no transaction would be considered to be a change in control for purposes of triggering these severance obligations if the transaction in question involved the security services industry or if procured by Mr. Ruzika, Richard C. Rochon, Mario B. Ferrari, Coconut Palm Capital Partners, Ltd. or any affiliate of theirs. Mr. Ruzika was also subject to a three-year noncompete covenant to the extent his employment is terminated (including not renewing his employment agreement) in a manner that does not entitle him to the severance payments described above. Mr. Ruzika was also subject to a two-year noncompete covenant to the extent his employment is terminated (including not renewing his employment agreement) in a manner that does entitle him to the severance payments described above; however, if we fail to make these severance payments, Mr. Ruzika’s noncompete obligations will no longer be in effect.

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On January 22, 2007, Mr. Ruzika resigned from his position as our Chief Executive Officer. On January 26, 2007, we entered into an Advisory Services Agreement with Mr. Ruzika, which became effective on January 22, 2007, and outlined the terms of his separation from us as well as a consulting arrangement pursuant to which Mr. Ruzika would remain involved with us in an advisory capacity. Under the terms of the Advisory Services Agreement, effective as of January 22, 2007, Mr. Ruzika’s employment agreement with us terminated and Mr. Ruzika resigned all of his positions as an officer of Devcon and as an officer and director, as applicable, of each of our affiliates. Mr. Ruzika will be paid salary earned and reasonable expenses reimbursable under his employment agreement incurred through January 22, 2007, which amounts we estimate equal $19,515 and an amount equal to $10,416.67 per month for a term of one year under the Advisory Services Agreement. In addition, to the extent permitted under our welfare benefit plans, Mr. Ruzika will remain a participant until the Advisory Services Agreement terminates. At the end of this term, the Advisory Services Agreement shall be automatically renewed on a month to month basis unless terminated by either us or Mr. Ruzika upon sixty (60) days notice. The Separation Agreement includes a release by each of us and Mr. Ruzika of claims that either party may have against the other in respect of Mr. Ruzika’s employment or the termination of such employment, as well as covenants relating to non-competition or non-solicitation of employees by Mr. Ruzika, protection of our proprietary and confidential information, non-disparagement by each of Mr. Ruzika and us and other matters.

On February 9, 2007, Mr. Hare resigned from all positions held by him with us and our subsidiaries, including as Chief Financial Officer. On February 14, 2007, we entered into a Separation Agreement with Mr. Hare outlining the terms of his separation from us as well as a consulting arrangement under the terms of which Mr. Hare would be available to us in a consulting capacity. Under the terms of the Separation Agreement, the Employment Letter issued as of November 28, 2005 to Mr. Hare by us terminated, effective as of February 9, 2007, and Mr. Hare resigned all of his positions as an officer of Devcon and as an officer and director, as applicable, of each of our affiliates. Under the terms of the Separation Agreement, Mr. Hare will be paid salary earned and reasonable expenses reimbursable under the Employment Letter incurred through February 14, 2007, which amounts we estimate equal $8,332.90 and an aggregate amount equal to $100,000 payable in installments the timing of which shall be monthly over a six month period. In addition, we agreed to assume Mr. Hare’s obligations under that certain apartment lease, dated January 16, 2006, as extended, the lease payments under which are anticipated to equal no more than $2,000 per month with a remaining term of ten months. The Separation Agreement includes a release by each of us and Mr. Hare of claims that either party may have against the other in respect of Mr. Hare’s employment or the termination of such employment, as well as covenants relating to non-competition or non-solicitation of employees by Mr. Hare, protection of our proprietary and confidential information, non-disparagement by Mr. Hare and other matters.

On January 27, 2005, we entered into an employment agreement with Ron G. Lakey under the terms of which Mr. Lakey would become our Chief Financial Officer. On April 13, 2005, Mr. Lakey became our Vice President – Business Development. On January 23, 2006, Mr. Lakey became our President of Construction and Materials. The Lakey Employment Agreement was effective on February 1, 2005 and provides for a term of two years, which term may be automatically renewed each year unless three months advance notice of nonrenewal is given. In addition, the Lakey Employment Agreement provided for an annual base salary of $200,000, discretionary bonuses to be determined at the discretion of our compensation committee, participation by Mr. Lakey in all benefit programs made available to other executive officers and eligibility for grants of options in accordance with our stock option plans. If within one year of a change of control, Mr. Lakey’s employment would have been terminated by us without cause or Mr. Lakey terminated his employment voluntarily, he would have received a lump sum payment equal to the sum of his current annual base salary and his average bonus and other average compensation during the last two years, and his stock options will immediately vest. The Lakey Employment Agreement defined a “Change of Control” as (i) our selling or transferring substantially all of our assets or (ii) any consolidation or merger or other business combination involving us where our shareholders would not, immediately after such business combination, beneficially own, directly or indirectly, shares representing fifty percent (50%) of the combined voting power of the surviving entity. The Employment Agreement also included covenants lasting for a term of two years relating to noncompetition and non-solicitation of employees and clients by Mr. Lakey. The Lakey Employment Agreement expired according to its own terms on January 31, 2007.

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On April 27, 2007, Mr. Lakey resigned from his position as our Chief Operating Officer and President — Construction and Materials. On April 27, 2007, we entered into an Advisory Services Agreement with Mr. Lakey, which became effective on such date, and outlined the terms of his separation from us as well as a consulting arrangement pursuant to which Mr. Lakey would remain involved with us in an advisory capacity. Under the terms of the Advisory Services Agreement, Mr. Lakey resigned all of his positions as an officer of Devcon and as an officer and director, as applicable, of each of our affiliates. Mr. Lakey will be paid salary, automobile insurance and accrued vacation earned in the amounts of $4,134.62, $150.00 and $13,230.77, respectively, and reasonable expenses reimbursable under his employment agreement incurred through April 27, 2007, which amounts we estimate equal $355. In addition, in return for the Advisory Services, the Advisory Services Agreement provides that we will pay Mr. Lakey the following amounts:

(i) a one-time $50,000 lump sum payment paid at the time of execution of the Advisory Services Agreement;

(ii) during an initial three-month term of the Advisory Services Agreement, we are obligated to pay Mr. Lakey monthly payments equal to $17,916.66;

(iii) during 30-day renewal terms of the Advisory Services Agreement, we will be obligated to pay Mr. Lakey monthly payments equal to $6,000.00; and

(iv) upon transfer of a 8,335 square meter parcel in Sint Maarten from Bouwbedrijf Boven Winden, N.V. to St. Maarten Masonry Products, both of which are our wholly-owned subsidiaries of ours, we will be obligated to pay to Mr. Lakey an additional one-time $50,000 lump sum payment.

At the end of the initial three-month term, the Advisory Services Agreement shall be automatically renewed on a month to month basis unless terminated by either us or Mr. Lakey upon thirty (30) days notice. The Advisory Services Agreement includes a release by each of us and Mr. Lakey of claims that either party may have against the other in respect of Mr. Lakey’s employment or the termination of such employment, as well as covenants relating to protection of our proprietary and confidential information, non-disparagement by each of Mr. Lakey and us and other matters.

Stock Option Plan

On September 22, 2006, our board of directors adopted the Devcon International Corp. 2006 Incentive Compensation Plan, which was approved by our shareholders on November 10, 2006. This plan is the only plan under which we currently issue stock options. Under this plan, our compensation committee has the authority to grant stock options, stock appreciation rights, restricted stock, deferred stock, other stock-related awards and performance awards that may be settled in cash, stock or other property to key employees, directors, consultants and independent. The effective date of this plan was September 22, 2006. As of March 31, 2007, options to purchase an aggregate of 313,000 shares of our common stock were outstanding under this plan, and options to purchase an aggregate of 306,650 shares of our common stock were outstanding under our other stock option plans.

Shares Available for Awards; Annual Per-Person Limitations. Under the 2006 Incentive Compensation Plan, the total number of shares of common stock that may be subject to the granting of options under the plan at any time during the term of the plan is equal to 800,000 shares, plus the number of shares with respect to which awards previously granted thereunder that terminate without being exercised, and the number of shares that are surrendered in payment of any awards or any tax withholding requirements. The total number of shares of our common stock that may be granted under the 2006 Incentive Compensation Plan represents approximately 6.8% of the issued and outstanding shares, on a fully diluted, fully converted basis as of March 31, 2007.

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Of the total number set forth above, not more than 400,000 may be used for awards under the 2006 Incentive Compensation Plan other than stock options or stock appreciation rights. Awards with respect to shares that are granted to replace outstanding awards or other similar rights that are assumed or replaced by awards under the 2006 Incentive Compensation Plan pursuant to the acquisition of a business are not subject to, and do not count against, the foregoing limit. In addition, the 2006 Incentive Compensation Plan imposes individual limitations on the amount of certain awards in part to comply with Code Section 162(m). Under these limitations, during any fiscal year no participant may be granted (i) options or stock appreciation rights with respect to more than 200,000 shares, or (ii) shares of restricted stock, shares of deferred stock, performance shares and other stock based-awards with respect to more than 200,000 shares, subject to adjustment in some circumstances. The maximum amount that may be earned by any one participant as a performance unit in respect of a performance period of one year is $1,500,000 and the maximum amount that may be earned by one participant as a performance unit in respect of a performance period greater than one year is $1,500,000 multiplied by the number of full years in the performance period.

Our compensation committee administers the 2006 Incentive Compensation Plan. The compensation committee is authorized to adjust the limitations described in the two preceding paragraphs and is authorized to adjust outstanding awards (including adjustments to exercise prices of options and other affected terms of awards) in the event that a dividend or other distribution (whether in cash, shares of our common stock or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange or other similar corporate transaction or event affects our common stock so that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of participants. The compensation committee is also authorized to adjust performance conditions and other terms of awards in response to these kinds of events or in response to changes in applicable laws, regulations or accounting principles.

Our compensation committee is authorized to select eligible persons to receive awards, determine the type and number of awards to be granted and the number of shares of our common stock to which awards will relate, specify times at which awards will be exercisable or settleable (including performance conditions that may be required as a condition thereof), set other terms and conditions of awards, prescribe forms of award agreements, interpret and specify rules and regulations relating to the 2006 Incentive Compensation Plan and make all other determinations that may be necessary or advisable for the administration of the 2006 Incentive Compensation Plan.

Eligibility. The persons eligible to receive awards under the 2006 Incentive Compensation Plan are our officers, directors, employees, consultants and other persons who provide services to us or any related entities. An employee on leave of absence may be considered as still in our employ or in the employ of a related entity for purposes of eligibility for participation in the 2006 Incentive Compensation Plan. As of March 31, 2007, approximately 720 persons are eligible to participate in the plan.

On April 1, 1999, our board of directors adopted the Devcon International Corp. 1999 Stock Option Plan, which was approved by our shareholders on June 10, 1999. The 1999 Stock Option Plan was subsequently amended by our board of directors on April 21, 2003, which amendment was approved by our shareholders on June 6, 2003. Under this plan, our compensation committee has the authority to grant incentive stock options and non-qualified stock options to key employees, directors, consultants and independent contractors and these options may be exercised using loans from us or shares of our common stock that are already owned by the holder. The effective date of this plan was April 1, 1999. As of March 31, 2007, options to purchase an aggregate of 197,403 shares of our common stock were outstanding under this plan. The 1999 Stock Option Plan has been superseded by the 2006 Incentive Compensation Plan.

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Outstanding Equity Awards at Fiscal Year-End

The following table provides information for the named executive officers as of December 31, 2006, concerning outstanding awards representing potential amounts that may be received in the future, including the amount of securities underlying exercisable and unexercisable options. No stock appreciation rights are outstanding.

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)	Option Expiration Date
George M. Hare, Former Chief Financial Officer	—		50,000	(1)	5.51	Nov 2016
Ron G. Lakey, Former Chief Operating Officer and President – Construction & Materials	—		60,000	(1)	5.51	Nov 2016
Stephen J. Ruzika, Former Chief Executive Officer and President	33,333 —		16,667 25,000	(1) (2)	9.00 5.51	July 2014 Nov 2016
Donald L. Smith III, Former Vice President – Construction Division	30,000 22,950	(3)	—   —	(4)	1.50 2.33	April 2009 —	(5)

(1) Stock options granted on November 10, 2006, and vest 33.33% annually, beginning on the first anniversary date of the date of grant.

(2) Stock options granted July, 2004, and vest 33.33% annually, beginning on the first anniversary date of the date of grant.

(3) Stock options granted April, 1999, and vest 33.33% annually, beginning on the first anniversary date of the date of grant.

(4) Stock options granted April, 1992, and vest 27% on December 1, 1994, an additional 25% on December 1, 1999 and thereafter subject to the terms of the option agreement.

(5) Options terminate after a period of time upon optionee death, attainment of age 65, a change in control and upon termination without cause.

Retirement Plan and Post-Employment

The Company does not maintain a pension plan or other non-qualified deferred compensation plan for its named executive officers.

There have been no terminations of named executive officers during the year ended December 31, 2006. However, we have entered into various separation or advisory services agreements with each of Messrs. Ruzika, Hare and Lakey upon their resignations from our company in 2007. See “Employment Agreements” for a description of the terms of these agreements.

Compensation Committee Interlocks and Insider Participation

Our compensation committee members are W. Douglas Pitts, Per-Olof Lööf and Donald Karnes. Until the time of his resignation from our board of directors on January 23, 2006, James R. Cast was also a member of the compensation committee.

Mr. James R. Cast, through his tax and consulting practice, has provided services to us and to Mr. Donald Smith, Jr. privately, for more than ten years. We paid Mr. Cast $75,000 and $59,400 for the consulting services provided to us in 2006 and 2005, respectively. Mr. Smith paid Mr. Cast $26,329 and $33,043 for the same periods, respectively.

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No member of our compensation committee is currently an officer or an employee of ours. No executive officer of ours serves as a member of our compensation committee or on a board or committee of any entity one or more of whose executive officers serves as a member of our board of directors or compensation committee. There were no compensation committee interlocks during the fiscal year ended December 31, 2006.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation Plans

The table below provides information relating to the Company’s equity compensation plans as of December 31, 2006.

	Number of shares to be issued upon exercise of outstanding options	Weighted average exercise price of outstanding options		Number of shares remaining available for future issuance under compensation plans (1)
Equity compensation plans:
Approved by shareholders	657,150	$	6.10	506,000
Not approved by shareholders	—	$	0.00	—
Total	657,150	$	6.10	506,000

(1) Excluding shares reflected in first column.

No employment or other agreements provide for the issuance of any shares of capital stock. There are no other options, warrants, or other rights to purchase securities of ours issued to employees and directors, other than options to purchase common stock issued under the 1986 Non-Qualified Stock Option Plan, the 1992 Directors Stock Option Plan, the 1992 Stock Option Plan, as amended, the 1999 Stock Option Plan, as amended, the 2006 Incentive Compensation Plan, Warrants issued in connection with the investment by Coconut Palm Capital Investors I, Ltd., Warrants issued in connection with the issuance of our Series A Convertible Preferred Stock and Options to purchase 50,000 shares were issued to Matrix Desalination, Inc. at an exercise price of $6.38 in May 2003. The vesting of the options issued to Matrix was dependent on the consummation of certain investments for DevMat Utility Resources, LLC. For more information regarding the Company’s equity compensation plans, see Note 14, Stock Option Plans.

Repurchases of Company Shares

The Company terminated its share repurchase plan on November 8, 2004.

Security Ownership of Certain Beneficial Owners and Management

The following table shows as of March 31, 2007 (or such other date indicated in the footnotes below), the number of shares beneficially owned and the percentage ownership of the Company’s common stock, by the following:

(a) each person known to management to own beneficially more than five percent of the outstanding shares of the Company’s common stock;

(b) each of the Company’s directors;

(c) each of the named executive officers; and

(d) all of the Company’s directors and executive officers as a group.

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	Common Stock Beneficially Owned(1)(2)
	Shares	Percent
Donald L. Smith, Jr. (3)	1,394,034	22.11	%
Smithcon Family Investments, Ltd (4)	985,365	15.84	%
Richard L. Hornsby (5)	84,499	1.36	%
Gustavo R. Benejam (6)	25,000	*
W. Douglas Pitts (7)	24,000	*
Richard C. Rochon (8)	6,014,000	58.77	%
Mario B. Ferrari (9)	6,014,000	58.77	%
Per-Olof Lööf (10)	14,000	*
Stephen J. Ruzika (11)	975,976	13.92	%
Donald L. Smith, III (12)	125,114	2.01	%
Donald K. Karnes (13)	68,838	1.10	%
Coconut Palm Capital Investors I, Ltd. (14)	6,000,000	58.71	%
CSS Group, Inc. (15)	650,000	9.46	%
RPCP Investments, LLLP (16)	1,350,000	17.84	%
Patricia L. Armstrong Trust (17)	381,659	6.13	%
Ron Lakey	—	—
Robert C. Farenhem (18)	6,000,000	58.71	%
George M. Hare	—	—
P. Rodney Cunningham(19)	63,000	1.01	%
HBK Investments L.P.(20)	655,313	9.72	%
All directors and executive officers as a group (13 persons)	3,791,464	76.84	%

*Less than 1%.

(1) Unless otherwise indicated, the address of each of the beneficial owners is 595 South Federal Highway, Suite 500, Boca Raton, Florida 33432.

(2) Unless otherwise indicated, each person or group has sole voting and investment power with respect to all such shares. For purposes of the following table, a person is deemed to be the beneficial owner of securities that can be acquired by the person upon the exercise of warrants or options within 60 days of the record date. Each beneficial owner’s percentage is determined by assuming that options or warrants that are held by the person, but not those held by any other person, and which are exercisable within 60 days of the date of this table, have been exercised.

(3) Mr. Smith’s holdings consist of (i) 305,481 shares directly owned by Mr. Donald L. Smith, Jr., (ii) 985,365 shares held by Smithcon Family Investments, Ltd., an entity controlled by Smithcon Investments, Inc., a corporation that is wholly owned by Mr. Smith, (iii) 17,628 shares held by Smithcon Investments and (iv) 85,560 shares issuable upon exercise of options that are currently exercisable, excluding 1,140 shares issuable upon exercise of options that will not be exercisable within 60 days of the date of this table.

(4) All 985,365 shares held by Smithcon Family Investments, Ltd. are deemed beneficially owned by Donald L. Smith, Jr. and are included in the above table for each of Mr. Smith and Smithcon Family Investments, Ltd. See footnote (3) for a description of the relationship between Smithcon Family Investments, Ltd. and Mr. Smith.

(5) Consists of (i) 78,499 shares directly owned by Mr. Hornsby and (ii) 6,000 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table.

(6) Consists of (i) 10,000 shares owned by Mr. Benejam and (ii) 15,000 shares issuable upon exercise of options that are currently exercisable.

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(7) Consists of (i) 17,000 shares owned by Mr. Pitts and (ii) 7,000 shares issuable upon exercise of options that are currently exercisable.

(8) Consists of (i) 83,333 shares owned by Mr. Rochon, (ii) 14,000 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table and (iii) 83,333 shares issuable upon exercise of currently exercisable warrants. Additionally, includes 1,350,000 shares of common stock issuable upon exercise of currently exercisable warrants, all of which are owned of record and beneficially by RPCP Investments, LLLP. Assumes beneficial ownership of such shares is attributed to Mr. Rochon due to Mr. Rochon’s status as an officer and a director of RPCP Investments, Inc., the general partner of RPCP Investments, LLLP, and the resulting power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by RPCP Investments, LLLP of this table. Mr. Rochon disclaims beneficial ownership of these shares. Also includes 2,000,000 shares of common stock (including the 83,333 noted above) and an additional 4,000,000 shares of common stock issuable upon exercise of currently exercisable warrants (including the 83,333 warrants and the RPCP warrants noted above), all of which are beneficially owned, but not owned of record, by Coconut Palm Capital Investors I, Ltd. Coconut Palm Capital Investors I, Ltd.’s beneficial ownership of these shares and warrants is solely attributed to a voting arrangement among the limited partners of Coconut Palm Capital Investors I, Ltd. granting its general partner, Coconut Palm Capital Investors I, Inc., a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners of Coconut Palm Capital Investors I, Ltd. at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders. Assumes beneficial ownership of such shares is attributed to Mr. Rochon, due to Mr. Rochon’s status as the sole shareholder and an officer and a director of Coconut Palm Capital Investors I, Inc., and the resulting power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by Coconut Palm Capital Investors I, Ltd. Mr. Rochon disclaims beneficial ownership of these shares. The information with respect to Coconut Palm Capital Investors I, Ltd. and RPCP Investments, LLLP is based solely on an Amendment No. 3 to Schedule 13D, dated February 10, 2006.

(9) Includes 14,000 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table. Additionally, includes 1,350,000 shares of common stock issuable upon exercise of currently exercisable warrants, all of which are owned of record and beneficially by RPCP Investments, LLLP. Assumes beneficial ownership of such shares is attributed to Mr. Ferrari due to Mr. Ferrari’s status as an officer and a director of RPCP Investments, Inc. and the resulting power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by RPCP Investments, LLLP. Mr. Ferrari disclaims beneficial ownership of these shares. Also, includes 2,000,000 shares of common stock and an additional 4,000,000 shares of common stock issuable upon exercise of currently exercisable warrants (including the RPCP warrants noted above), all of which are beneficially owned, but not owned of record, by Coconut Palm Capital Investors I, Ltd. Coconut Palm Capital Investors I, Ltd.’s beneficial ownership of these shares and warrants is solely attributed to a voting arrangement among the limited partners of Coconut Palm Capital Investors I, Ltd. granting its general partner, Coconut Palm Capital Investors I, Inc., a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners of Coconut Palm Capital Investors I, Ltd. at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders. Assumes beneficial ownership of such shares is attributed to Mr. Ferrari due to Mr. Ferrari’s status as an officer and a director of Coconut Palm Capital Investors I, Inc. and the resulting power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by the limited partners of Coconut Palm Capital Investors I, Ltd. due to a voting arrangement granting Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners of Coconut Palm Capital Investors I, Ltd. at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders. Mr. Ferrari disclaims beneficial ownership of these shares. The information with respect to Coconut Palm Capital Investors I, Ltd. and RPCP Investments, LLLP is based solely on an Amendment No. 3 to Schedule 13D, dated February 10, 2006.

(10) Consists of 14,000 shares issuable upon exercise of options that are currently exercisable.

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(11) Consists of (i) 181,533 shares directly held by Mr. Ruzika, (ii) 33,333 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table and does not include 41,667 shares issuable upon exercise of options that will not be exercisable within 60 days of the date of this table and (iii) 111,110 shares issuable upon exercise of currently exercisable warrants. Also includes 650,000 shares of common stock issuable upon exercise of currently exercisable warrants, all of which are owned of record and beneficially by CSS Group, Inc. Assumes beneficial ownership of such shares is attributed to Mr. Ruzika due to Mr. Ruzika’s status as an officer and a director of CSS Group and the resulting power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by CSS Group. Mr. Ruzika disclaims beneficial ownership of these shares. In addition, Mr. Ruzika owns a limited partnership interest in Coconut Palm Capital Investors I, Ltd. and has entered into a voting arrangement with the other limited partners of Coconut Palm granting Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of the shares of the Company’s common stock that he owns of record. The information with respect to CSS Group, Inc. is based solely on Amendment No. 1 to Schedule 13D, dated February 10, 2006.

(12) Includes (i) 86,464 shares directly owned by Mr. Donald L. Smith, III and his wife, (ii) 38,200 shares beneficially owned that are held in trust by Donald L. Smith, III for the benefit of his children, to which latter shares Mr. Smith disclaims beneficial ownership and (iii) 450 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table.

(13) Consists of (i) 36,394 shares owned by Mr. Karnes, (ii) 19,444 shares issuable upon exercise of currently exercisable warrants and (iii) 13,000 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table. Mr. Karnes owns a limited partnership interest in Coconut Palm Capital Investors I, Ltd. and has entered into a voting arrangement with the other limited partners of Coconut Palm granting Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of his shares of the Company’s common stock. See “Voting Arrangements—Senior Management and Coconut Palm Voting Arrangement” below.

(14) Consists of 2,000,000 shares of common stock and an additional 4,000,000 shares of common stock issuable upon exercise of currently exercisable warrants, all of which are beneficially owned, but not owned of record, by Coconut Palm. In addition, beneficial ownership of such shares may be attributed to Coconut Palm Capital Investors I, Inc., the general partner of Coconut Palm Capital Investors I, Ltd., due to a voting arrangement granting Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners of Coconut Palm Capital Investors I, Ltd. at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders. Beneficial ownership may also be attributed to Messrs. Rochon, Ferrari and Farenhem as described in footnotes (8), (9) and (18) above. Messrs. Rochon, Ferrari and Farenhem disclaim beneficial ownership of these shares. The information with respect to Coconut Palm is based solely on an Amendment No. 3 to Schedule 13D, dated February 10, 2006

(15) Consists of 650,000 shares of common stock issuable upon exercise of currently exercisable warrants, all of which are owned of record and beneficially by CSS Group. In addition, beneficial ownership may be attributed to Mr. Ruzika as described in footnote (11) above. The information with respect to CSS Group is based solely on Amendment No. 1 to Schedule 13D, dated February 10, 2006.

(16) Consists of 1,350,000 shares of common stock issuable upon exercise of currently exercisable warrants, all of which are owned of record and beneficially by RPCP Investments, LLLP. In addition, beneficial ownership of such shares may be attributed to RPCP Investments, Inc., the general partner of RPCP, due to its power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by RPCP. Beneficial ownership may also be attributed to Messrs. Rochon, Ferrari and Farenhem as described in footnotes (8), (9) and (18) above, respectively. The information with respect to RPCP is based solely on an Amendment No. 3 to Schedule 13D, dated February 10, 2006.

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(17) Consists of (i) 372,659 shares and (ii) 9,000 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table, all of which were formerly owned by Mr. Robert D. Armstrong, a former director of the Company, who passed away on May 21, 2005.

(18) Includes 1,350,000 shares of common stock issuable upon exercise of currently exercisable warrants, all of which are owned of record and beneficially by RPCP Investments, LLLP. Assumes beneficial ownership of such shares is attributed to Mr. Farenhem due to Mr. Farenhem’s status as an officer and a director of RPCP Investments, Inc. and the resulting power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by RPCP Investments, LLLP. Mr. Farenhem disclaims beneficial ownership of these shares. Also, includes 2,000,000 shares of common stock and an additional 4,000,000 shares of common stock issuable upon exercise of currently exercisable warrants (including the RPCP warrants noted above), all of which are beneficially owned, but not owned of record, by Coconut Palm Capital Investors I, Ltd. Coconut Palm Capital Investors I, Ltd.’s beneficial ownership of these shares and warrants is solely attributed to a voting arrangement among the limited partners of Coconut Palm Capital Investors I, Ltd. granting its general partner, Coconut Palm Capital Investors I, Inc., a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners of Coconut Palm Capital Investors I, Ltd. at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders. Assumes beneficial ownership of such shares is attributed to Mr. Farenhem due to Mr. Farenhem’s status as an officer and a director of Coconut Palm Capital Investors I, Inc. and the resulting power to direct the voting of any shares of common stock that may be deemed to be beneficially owned by the limited partners of Coconut Palm Capital Investors I, Ltd. due to a voting arrangement granting Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners of Coconut Palm Capital Investors I, Ltd. at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders. Mr. Farenhem disclaims beneficial ownership of these shares. The information with respect to Coconut Palm Capital Investors I, Ltd. and RPCP Investments, LLLP is based solely on an Amendment No. 3 to Schedule 13D, dated February 10, 2006

(19) Consists of (i) 25,000 shares directly held by Mr. Cunningham, (ii) 25,000 shares issuable upon exercise of currently exercisable warrants and (iii) 13,000 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of the date of this table. Mr. Cunningham owns a limited partnership interest in Coconut Palm Capital Investors I, Ltd. and has entered into a voting arrangement with the other limited partners of Coconut Palm granting Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of his shares of the Company’s common stock. See “Voting Arrangements—Senior Management and Coconut Palm Voting Arrangement” below.

(20) Consists of (i) 132,780 unregistered shares of our common stock and (ii) shares of our common stock issuable upon conversion of our Series A Convertible Preferred Stock and warrants held of record by HBK Main Street Investments L.P. The terms of the Series A Convertible Preferred Stock and the warrants limit the number of shares that may be issued in the aggregate upon conversion or exercise of these securities to 9.99% of our outstanding common stock. Due to their relationship of control and ownership over and with respect to HBK Main Street Investments L.P., each of HBK Investments L.P., HBK Partners II L.P. and HBK Management LLC may be deemed to be the beneficial owner of such securities. In addition, HBK Investments L.P. has delegated discretion to vote and dispose of the Securities to HBK Services LLC. HBK Services may, from time to time, delegate discretion to vote and dispose of certain of these securities to HBK New York LLC, HBK Virginia LLC, HBK Europe Management LLP, and/or HBK Hong Kong Ltd. Each of HBK Services and these other entities is under common control with HBK Investments L.P. Jamiel A. Akhtar, Richard L. Booth, David C. Haley, Lawrence H. Lebowitz, and William E. Rose are each managing members of HBK Management LLC. The address for these entities is c/o HBK Services LLC, 300 Crescent Court, Suite 700, Dallas, Texas 75201. The information with respect to the HBK entities is based solely on an Amendment No. 1 to Schedule 13G, dated December 31, 2006.

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Voting Arrangements

Coconut Palm Voting Arrangements

On April 4, 2005, one of the Company’s shareholders, Coconut Palm Capital Partners I, Ltd., distributed an aggregate of 396,674 shares of the Company’s common stock plus warrants to purchase 396,674 additional shares of common stock to certain of its limited partners in exchange for the redemption of their respective limited partnership interests. In accordance with Coconut Palm’s limited partnership agreement, Coconut Palm’s limited partners who had requested redemption paid to Coconut Palm an aggregate of $1,000.00 for legal fees incurred by Coconut Palm in connection with the redemption of the limited partnership interests. Coconut Palm’s limited partners include Coconut Palm Capital Investors I, Inc., CSS Group, Inc., RPCP Investments, LLLP, as well as Messrs. Ruzika, Rochon, Ferrari and Karnes. Messrs. Rochon and Ferrari also are officers and directors of Coconut Palm Capital Investors I, Inc. Mr. Ruzika is an officer and director of CSS Group, Inc. None of the above named limited partners were involved in the first distribution. In connection with the first distribution of shares, Coconut Palm’s limited partners who had been deemed granted to Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders.

On April 14, 2005, Coconut Palm distributed an aggregate of 19,992 shares of the Company’s common stock plus warrants to purchase 19,992 additional shares of common stock to its limited partners in exchange for the redemption of their respective limited partnership interests. In accordance with Coconut Palm’s limited partnership agreement, Coconut Palm’s limited partners who had requested redemption paid to Coconut Palm an aggregate of $250.00 for legal fees incurred by Coconut Palm in connection with the redemption of the limited partnership interests. Similar to the first distribution of shares, in connection with the second distribution of shares, Coconut Palm’s limited partners who had been deemed granted to Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners at any meeting of Devcon’s shareholders, as well as in any action by written consent of Devcon’s shareholders.

On June 28, 2005, Coconut Palm distributed 1,583,334 shares of the Company’s common stock plus warrants to purchase 3,583,334 additional shares of common stock to its limited partners in exchange for the redemption of their respective limited partnership interests. This third distribution represented all of the remaining common stock and warrants held by Coconut Palm. No payment was made by the limited partners to Coconut Palm in connection with the third distribution of shares. Coconut Palm’s limited partners who had been redeemed did, however, grant to Coconut Palm Capital Investors I, Inc. a proxy to vote, in its sole discretion, a significant portion of the securities owned by the limited partners at any meeting of Devcon’s shareholders as well as in any action by written consent of Devcon’s shareholders.

Arrangements Possibly Resulting in a Change in Control

Upon exercise of the warrants it holds, Coconut Palm Capital Partners I, Ltd. would beneficially own but not own of record 6,000,000 shares of the Company’s common stock giving it beneficial ownership of approximately 60% of Devcon’s common stock outstanding as of March 31, 2007. Accordingly, if Coconut Palm were to exercise its warrants, it would have enough shares of our common stock to control our company.

The terms of the Series A Convertible Preferred Stock and the warrants issued in connection with their issuance limit the number of shares that may be issued in the aggregate upon conversion or exercise of these securities to 9.99% of our outstanding common stock. However, should this limitation not apply, upon such conversion or exercise, HBK would own 4,952,830 shares of our common stock or 45.1% on a fully-diluted as converted basis. In addition, under the terms of the governing Certificate of Designations, we may issue additional shares of our common stock in satisfaction of our dividend obligations with respect to the Series A Convertible Preferred Stock. Accordingly, if HBK were to convert its shares of Series A Convertible Preferred Stock and exercise its warrants without application of the aforementioned limitations and we issued a sufficient number of additional shares in satisfaction of our dividend obligations, HBK could acquire enough shares of our common stock to control our company.

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Item 13. Certain Relationships and Related Transactions

Our policies and codes provide that related person transactions be approved in advance by either the audit committee of our board of directors or a majority of disinterested directors.

We leased from the wife of Mr. Donald L. Smith, Jr., a Director and former Chairman and Chief Executive Officer of ours, a 1.8-acre parcel of real property in Deerfield Beach, Florida. This property was used for our equipment logistics and maintenance activities. The property was subject to a 5-year lease entered into a January 2002 providing for rent of $95,000 per year. This rent was based on comparable rental contracts for similar properties in Deerfield Beach, as evaluated by management. The lease expired December 31, 2006 and had been extended to December 31, 2007. On March 21, 2007, in connection with the sale of substantially all of the assets of our construction division, we assigned this lease to the buyer of the business.

We have entered into various construction and payment deferral agreements with an entity which owns and manages a resort project in the Bahamas in which Mr. Donald L. Smith Jr., a director and former Chairman and Chief Executive Officer of ours and a subsidiary of ours are minority partners owning 11.3 percent and 1.2 percent, respectively. Mr. Smith is also a member of the entity’s managing committee.

• As of January 1, 2003, we entered into a payment deferral agreement with the resort project whereby several notes, which are guaranteed partly by certain owners of the project, evidenced a loan totaling $2.0 million owed to us. Mr. Donald Smith, Jr. issued a personal guarantee for the total amount due under this loan agreement to us. The loan was paid and the personal guarantee released during 2006.

• We have entered into construction contracts with the resort project. In late 2004, we entered into a $15.2 million contract, which contract was increased to $15.9 million, to construct a marina and breakwater for the same entity. The resort project secured third party financing for this latter contract. We entered into a vertical construction contract with another entity for $3.0 million during the second quarter of 2005. Mr. Smith is a partner of this entity. In connection with contracts on the project, we recorded revenues of $0.3 million for 2006. As of December 31, 2006, the marina and breakwater contract was substantially complete.

• The outstanding balance of trade receivables from the resort project was $0.3 million as of December 31, 2006. The outstanding balance of note receivables was zero as of December 31, 2006. During the year ended December 31, 2006, we recorded $28,138 in interest income form the notes. The billings in excess of cost were zero as of December 31, 2006. Mr. Smith has guaranteed the payment of the receivables from the entity, up to a maximum of $3.0 million, including the deferral agreement described above. The guarantee of collectibility by Mr. Smith was terminated as part of the agreements identified below as the Smith Note and the EBR Receivable Agreement.

• During the second quarter of 2005, after receiving approval by our audit committee, one of our subsidiaries entered into a $3.0 million agreement to construct a residence on a parcel of property located within the resort complex known as Emerald Bay Resorts on the island of Exuma, Bahamas. Donald L. Smith, Jr., a director and our former Chairman and Chief Executive Officer, is a party to this agreement and has a 50% interest in the ownership of the land on which the residence is being constructed together with one other party who has the remaining 50% interest in the ownership of this land, as well as a controlling interest in the resort project in the Bahamas. Mr. Smith has a minority interest in the resort and also sits on committees which govern the affairs of the resort. Mr. Smith and his partner have agreed to share in all profits, if any, generated by this parcel in accordance with their respective interests. As a result of change orders to the scope of the work to be performed, the total amounts which can be invoiced by us with respect to this project was $1.4 million as of December 31, 2006. In accordance with our accounting policies, we recorded a loss of $0.1 million in our 2006 operating results. Since June 2005, the month in which the project started, through December 31, 2006, we recorded revenue of $1.4 million with respect to this project and as of December 31, 2006, the accounts receivable outstanding attributable to this project amounted to $0.2 million. This construction contract was terminated in the first quarter of 2007 as described below in the last paragraph of this “Item 13—Certain Relationships and Related Transactions”. The various amounts set forth in this paragraph reflect the impact of this termination.

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On June 6, 1991, we issued an unsecured, prime rate interest bearing, promissory note, the Smith Note, in favor of Donald L. Smith, Jr., a director and our former Chairman and Chief Executive Officer, in the aggregate principal amount at the time of issuance of $2.1 million with a maturity date of January 1, 2004. Subsequently, the maturity date of the Smith Note was extended by the parties until October 1, 2005. As of March 31, 2006, $1.7 million was outstanding under the Smith Note. Under the terms of a guarantee agreement dated March 10, 2004, between us and Mr. Smith where Mr. Smith, among others, agreed to guarantee certain loan notes receivable due from EBR Holding Limited, or EBRH, amounting to $2.2 million at that time, Mr. Smith agreed to maintain collateral for these guarantees in the amount of $1.8 million. The balance due to Mr. Smith under the Smith Note served as collateral for the aforementioned required amount.

In May 2006, we restructured and satisfied the Smith Note and all notes due from EBRH, or the EBR Notes. Also, in May 2006, we entered into two agreements: (i) the first agreement, or the Smith Note Agreement, was between us and Mr. Smith; and (ii) the second agreement, or the EBR Note Agreement, was among us, EBRH, EBR Properties Limited and Emerald Bay Resort & Co., which we collectively refer to as EBR. Under the terms of the Smith Note Agreement, Mr. Smith agreed to cancel the Smith Note in exchange for our assignment to Mr. Smith of certain notes EBR had previously issued to us with an aggregate amount due from EBR at time of assignment equal to $1.0 million plus accrued interest. As part of this restructuring, we also made a cash payment of $458,525 to Mr. Smith in satisfaction of all remaining amounts now due under the Smith Note. This restructuring satisfied all amounts due under all notes due from EBRH. In addition, as part of this restructuring, we received $56,000 in cash from EBRH, and EBR agreed to use its good faith efforts to transfer to us an approximately 14% interest which EBR had in a redi-mix batch plant which we control in Great Exuma, Bahamas. We have also agreed to surrender the minority equity interest we held in EBR.

Mr. James R. Cast, a former director, through his tax and consulting practice, has provided services to us for more than ten years. We paid Mr. Cast $59,400 and $59,400 for consulting services provided to us in 2005 and 2004, respectively. Additionally, Mr. Cast resigned from our board of directors in January 2006. Before resigning, we entered into a consulting agreement for tax and consulting services to be performed during 2006 for a specified number of consulting hours and for the total amount of $75,000.

We have entered into a retirement agreement with Mr. Richard Hornsby, our former Senior Vice President and a director. He retired at the end of 2004. During 2005, he received his full salary. From 2006, he will receive annual payments of $32,000 for life. During 2003, we recorded an expense of $232,000 for services rendered; this amount was paid out in 2005. We expensed the net present value of the obligation to pay Mr. Hornsby $32,000 annually for life, over his estimated remaining service period with us, i.e. during 2004. As of December 31, 2006, the net present value of the future obligation is estimated at $276,933.

On August 12, 2005, we entered into a management services agreement, dated as of August 12, 2005, with Royal Palm Capital Management, LLLP, to provide management services. Royal Palm is an affiliate of Coconut Palm Capital Investors I Ltd. with whom we completed a transaction on June 30, 2004, whereby Coconut Palm invested $18 million in us with the intent that we would enter into the electronic security services industry. Richard Rochon and Mario Ferrari, two of our directors, are principals of Coconut Palm and Royal Palm. Robert Farenhem, our Chief Financial Officer, is a principal of Royal Palm and was our interim Chief Financial Officer from April 2005 until December 2005.

The management services to be provided under the management agreement include, among other things, assisting us with, among other matters, establishing certain office, accounting and administrative procedures, obtaining financing relating to business operations and acquisitions, developing and implementing advertising,

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promotional and marketing programs, facilitating certain securities matters (both proposed offerings and ongoing compliance issues) and future acquisitions and dispositions, developing tax planning strategies, and formulating risk management policies. Under the terms of the management agreement, we are obligated to pay Royal Palm a management fee in the amount of $30,000 per month. In connection with the management agreement, we incurred $360,000 during the year ended December 31, 2006.

On January 23, 2006, we entered into a stock purchase agreement with Donald L. Smith, Jr., a director and our former Chairman and Chief Executive Officer, under the terms of which we agreed to sell to Mr. Smith all of the issued and outstanding shares of two of our subsidiaries, Antigua Masonry Products, Ltd., an Antigua corporation, or AMP, and M21 Industries, Inc., or M21 for an aggregate purchase price equal to approximately $5 million, subject to adjustments provided in the stock purchase agreement. AMP and M21 collectively comprise the operations of our materials division in Antigua. The stock purchase agreement permitted $1,725,000 of the purchase price to be paid by cancellation of a note payable by us to Mr. Smith. We retained the right to review other offers to purchase these Antigua operations. The parties to the stock purchase agreement elected to exercise their right to negotiate the sale of our materials division in Antigua with a third party. As a result, on March 2, 2006, we entered into a stock purchase agreement with A. Hadeed or his nominee and Gary O’Rourke and terminated the stock purchase agreement entered into with Mr. Smith on January 23, 2006. The terms of the new stock purchase agreement provided for a purchase price equal to approximately $5.1 million, subject to adjustments provided in the stock purchase agreement. The entire purchase price was contemplated to be paid entirely in cash as opposed to the partial payment through surrender of the $1,725,000 note we had previously issued to Mr. Smith. In addition, the terms of the new stock purchase agreement excluded M21 from the sale, but contemplated transfers of certain assets from the Antigua operations to us as well as the pre-closing transfer to AMP of certain preferred shares in AMP that were owned by us. The purchaser has agreed to pay all taxes incurred as a result of the transaction. We completed the sale of our materials division in Antigua on March 2, 2006.

See “Item 11 — Executive Compensation — Employment Agreements” for a description of the terms and conditions of various Advisory Services Agreements and Separation Agreements entered into with each of Stephen J. Ruzika, George M. Hare and Ron G. Lakey in connection with their resignations from Devcon.

On March 12, 2007, we entered into an asset purchase agreement with BitMar Ltd., a Turks and Caicos corporation and successor-in-interest to Tiger Oil, Inc., a Florida corporation, to sell fixed assets, inventory and customer lists constituting a majority of the assets of our construction division for approximately $5.3 million, subject to a holdback of $525,000 to be retained for resolution of certain indemnification matters in the form of a non-negotiable promissory note bearing a term of 120 days. We retained working capital of $6.7 million, including approximately $2.1 million in notes receivable, as of December 31, 2006. The majority of our leasehold interests were retained by us with the purchaser assuming only our shop location at Southwest 10th Street, Deerfield Beach, Florida which we leased from the wife of Donald L. Smith, Jr., a director and former Chairman and Chief Executive Officer of ours (described above) and entering into a 90-day sublease of the headquarters of the construction division located at 1350 East Newport Center Drive in Deerfield Beach, Florida. In addition, we entered into a three-year noncompetition agreement under the terms of which we agreed not to engage in business competitive with that of the construction division in any country, territory or other area bordering the Caribbean Sea and the Atlantic Ocean, excluding any production and distribution of ready-mix concrete, crushed stone, sand, concrete block, asphalt and bagged cement throughout this territory and also agreed to other standard provisions concerning the non-solicitation of customers and employees of the construction division. In addition, we entered into a Transition Services Agreement with the purchaser under the terms of which, we agreed to make available certain of our employees and independent contractors and other non-employees to assist purchaser with the operation of the construction division through September 16, 2007. As a result of this transaction, we recognized a loss from this sale in the fourth quarter of 2006 in an amount equal to approximately $3.0 million, prior to any employee severance and other transaction-related expenses. The transaction is closed on March 21, 2007. Mr. Smith and his son, Donald L. Smith, III, a former officer of ours, are principals of the purchaser.

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On March 13, 2007, we entered into a Termination and Release Agreement with Donald L. Smith, Jr. under the terms of which Mr. Smith agreed to terminate that certain Construction Agreement, dated as of June 1, 2005, concerning the construction of a residence on a parcel of property which is 50% owned by Mr. Smith and located within the resort complex known as Emerald Bay Resorts on the island of Exuma (described above), and released us from any past, present or future obligations under the Construction Agreement. Mr. Smith has agreed to indemnify us for all losses incurred by us in connection with the assertion by a third party to the Construction Agreement whose assent to the Termination and Release Agreement was not obtained of any claim or demand against us to the extent such claim or demand arises directly or indirectly from the Construction Agreement.

Item 14. Principal Accountant Fees and Services

The following table presents fees for professional services rendered by the Company’s independent registered public accounting firms, Berenfeld, Spritzer, Shechter & Sheer (“BSS&S”) and KPMG LLP (“KPMG”), for the audit of the Company’s annual consolidated financial statements and internal control over financial reporting for the years ended December 31, 2006 (BSS&S) and 2005 (KPMG), together with fees billed for other services rendered by the firms during those periods.

	2006		2005
Audit Fee (1)	$	170,700	$	681,100
Audit-Related Fees (2)		17,000		68,000
Tax Fees		—		—
All Other Fees (3)		—		1,500
Total Fees	$	187,700	$	750,600

⁽¹⁾ Audit fees consist principally of the audit of the consolidated financial statements included in the Company’s annual report on Form 10-K and the review of the interim condensed consolidated financial statements included in the Company’s quarterly reports on Form 10-Q.

⁽²⁾ Audit-related fees include review of the Company’s 8-K filings and proxy statement and comfort letter preparation.

⁽³⁾ All other services include the license to accounting research online, KPMG’s online accounting research product.

All audit-related services, tax services and other services were pre-approved by the audit committee, which concluded that the provision of these services by BSS&S was compatible with the maintenance of the firms’ independence in the conduct of auditing functions. The audit committee’s charter provides the audit committee with authority to pre-approve all audit and allowable non-audit services to be provided to the Company by its external auditors.

In its performance of these responsibilities, prior approval of some non-audit services is not required if:

(i) these services involve no more than 5% of the revenues paid by the Company to the auditors during the fiscal year;

(ii) these services were not recognized by the Company to be non-audit services at the time of the audit engagement, and

(iii) these services are promptly brought to the attention of the audit committee and are approved by the audit committee prior to completion of the audit for that fiscal year.

The audit committee is permitted to delegate the responsibility to pre-approve audit and non-audit services to one or more members of the audit committee as long as any decision made by that member or those members is presented to the full audit committee at its next regularly scheduled meeting.

The audit committee annually reviews the performance of its independent registered public accounting firm and the fees charged for its services.

151

The audit committee of the Company’s board of directors has considered whether the provision of the above-described services is compatible with maintaining BSS&S’s independence and believes the provision of such services is not incompatible with maintaining this independence.

PART IV

Item 15. Exhibits, and Financial Statement schedules

(a) The following documents are filed as part of this report:

(1) Consolidated financial statements.

An index to consolidated financial statements for the year ended December 31, 2006 appears on page xx.

(2) Financial Statement Schedule.

All financial schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the consolidated financial statements or notes thereto.

(3) Exhibits.

Exhibit	Description
2.1	Asset Purchase Agreement, dated as of March 12, 2007, by and between Tiger Oil, Inc. and Devcon International Corp. (32) (2.1)
3.1	Registrant’s Restated Articles of Incorporation (1)(3.1); (13)(3.1); (25)(Annex A)
3.2	Registrant’s Amended and Restated Bylaws (6) (3.2)
4.1	Certificate of Designations of Series A Convertible Preferred Stock (27) (4.1)
10.1	Registrant’s 1986 Non-Qualified Stock Option Plan (2)(10.1)
10.2	Registrant’s 1992 Stock Option Plan (4)(A)
10.3	Registrant’s 1992 Directors’ Stock Option Plan (4)(B)
10.4	Form of Indemnification Agreement between the Registrant, and its directors and certain of its officers (3)(A)
10.5	Material Purchase Agreement, dated August 17, 1995, between Bouwbedrijf Boven Winden, N.V. and Hubert Petit, Francois Petit and Michel Petit (5) (10.41)
10.6	Stock Purchase Agreement, dated August 17, 1995, between the Registrant and Hubert Petit, Francois Petit and Michel Petit (5)(10.42)
10.7	Second Amended and Restated Salary Continuation and Retirement Benefit Agreement dated June 30, 2000 (7)(10.32)
10.8	Registrant’s 1999 Stock Option Plan, as amended (8) (Appendix A)
10.9	Operating Agreement of Devcon/Matrix Utility Resources, LLC (9) (10.30)
10.10	Option agreement for Devcon to buy all of Matrix assets (9) (10.31)
10.11	Stock option agreement for Matrix to buy Devcon Shares (9) (10.32)
10.12	Purchase Agreement by and between the Company and Coconut Palm Capital Investors, Ltd., dated April 2, 2004 (10) (Annex D)
10.13	Form of First Tranche Warrant Issued to Coconut Palm Capital Investors, Ltd. (10) (Annex E)

152

Exhibit	Description
10.14	Separation Agreement, dated as of September 29, 2004, by and between the Company and Jan Norelid (11) (99.2)
10.15	Letter Agreement, dated January 13, 2004, by and between Richard L. Hornsby and the Company concerning the Richard Hornsby Retirement Program (12) (10.1)
10.16	Management Services Agreement, dated August 12, 2005, by and between the Company and Royal Palm Capital Management, LLLP (14) (10.1)
10.17	Asset Purchase Agreement, dated August 15, 2005, among V.I. Cement and Building Products, Inc., Devcon International Corp. and Heavy Materials, LLC (15) (10.1)
10.18	Agreement and Plan of Merger, dated November 11, 2005, among Devcon International Corp, Devcon Acquisition, Inc. and Guardian International, Inc. (16) (2.1)
10.19	Stock Purchase Agreement, dated November 10, 2005 by and among Topspin Associates, L.P., Topspin Partners, L.P., Bariston Investments, LLC, Sheldon E. Katz, Mike McIntosh, Christopher E. Needham, Seller’s Representatives and Devcon Security Holdings, Inc. (17) (10.1)
10.20	Credit Agreement, dated November 10, 2005, by and among Devcon Security Holdings, Inc., Devcon Security Services Corp., Coastal Security Company, Coastal Security Systems, Inc. and Central One, Inc. and CapitalSource Finance LLC. (17) (10.2)
10.21	Bridge Loan Agreement dated November 10, 2005 by and among Borrowers, and CapitalSource Finance LLC (17) (10.3)
10.22	Stock Purchase Agreement, dated January 23, 2006, by and between the Company and Donald L. Smith, Jr. (18) (10.1)
10.23	Securities Purchase Agreement, dated as of February 10, 2006, by and between Devcon International Corp. and the investors set forth therein. (19) (10.1)
10.24	Notice of Termination of Stock Purchase Agreement, dated January 23, 2006, by and between the Company and Donald L. Smith, Jr. (20) (10.2)
10.25	Stock Purchase Agreement, dated March 2, 2006, by and between A. Hadeed and Gary O’Rourke and Devcon International Corp. (20) (10.3)
10.26	Form of Promissory Note issued by the Company and Steelheads Investment Ltd., Castlerigg Master Investments Ld., and CS Equity II LLC (21) (10.1)
10.27	Form of Warrant, dated February 10, 2006, by and among the Company and Steelheads Investment Ltd., Castlerigg Master Investments Ltd., and CS Equity II LLC (21) (10.2)
10.28	Amendment to Securities Purchase Agreement, dated as of February 24, 2006, by and between Devcon International Corp. and the investors set forth therein (22) (10.45)
10.29	Amendment to Promissory Note (HBK Main Street Investments L.P.) (22) (10.46)
10.30	Amendment to Promissory Note (CS Equity II LLC) (22) (10.47)
10.31	Amendment to Promissory Note (Castterigg Master Investments Ltd.) (22) (10.48)
10.32	Second Amendment to Securities Purchase Agreement, dated as of May 10, 2006, by and between Devcon International Corp. and the investors set forth therein (23) (10.1)
10.33	Second Amendment to Promissory Note (HBK Main Street Investments L.P.) (23) (10.2)
10.34	Second Amendment to Promissory Note (CS Equity II LLC) (23) (10.3)
10.35	Second Amendment to Promissory Note (Castterigg Master Investments Ltd.) (23) (10.4)

153

Exhibit	Description
10.36	Agreement, dated as of June 5, 2006, by and among EBR Holding Limited, Emerald Bay Resort & Co., Devcon International Corp. and Bahamas Construction & Development Ltd. (24) (10.1)
10.37	Agreement, dated as of June 5, 2006, by and among Donald L. Smith, Jr., Devcon International Corp and Bahamas Construction & Development Ltd. (24) (10.2)
10.38	Form of Registration Rights Agreement by and among Devcon International Corp. and the investors set forth therein (25) (Annex K)
10.39	2006 Incentive Compensation Plan (26) (Annex A)
10.40	First Amendment, Master Reaffimation and Joinder to CapitalSource Credit Agreement, dated as of March 6, 2006 (28) (10.1)
10.41	Second Amendment to CapitalSource Credit Agreement, dated as of April 11, 2006 (28) (10.2)
10.42	Waiver and Third Amendment to CapitalSource Credit Agreement, dated as of December 29, 2006 (28) (10.3)
10.43	Advisory Services Agreement, dated as of January 26, 2007, by and between Devcon International Corp. and Stephen J. Ruzika (29) (10.1)
10.44	Separation Agreement, dated as of February 14, 2007, by and between Devcon International Corp. and George M. Hare (30) (10.1)
10.45	Termination and Release Agreement, dated as of March 13, 2007, by and among Devcon International Corp., Devcon Construction and Development Corp, DSMS, Ltd. and Donald L. Smith, Jr. (32) (10.1)
10.46	Forbearance and Amendment Agreement, dated as of March 30, 2007, by and between Devcon International Corp. and HBK Main Street Investments L.P. (33) (10.1)
10.47	Forbearance and Amendment Agreement, dated as of March 30, 2007, by and between Devcon International Corp. and CS Equity II LLC (33) (10.2)
10.48	Amendment to Forbearance and Amendment Agreement, dated as of April 13, 2007, by and between Devcon International Corp. and HBK Main Street Investments L.P. (34) (10.1)
10.49	Amendment to Forbearance and Amendment Agreement, dated as of April 13, 2007, by and between Devcon International Corp. and CS Equity II LLC (34) (10.2)
10.50	V.I. Cement and Building Products Inc. 401(k) Retirement and Savings Plan (35) (10.4)
21.1	Registrant’s Subsidiaries (36)
23.1	Consent of Berenfeld, Spritzer, Shechter & Sheer (36)
23.2	Consent of KPMG LLP (36)
31.1	Chief Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (36)
31.2	Chief Financial Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (36)
32.1	Chief Executive Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (36)
32.2	Chief Financial Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (36)

(1) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Registration statement on Form S-2 (No. 33-31107).

154

(2) Incorporated by reference to the exhibit shown in the parentheses and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1987 (the “1987 10-K”).

(3) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Proxy Statement dated May 30, 1989.

(4) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Proxy Statement dated May 6, 1992.

(5) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1995.

(6) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998.

(7) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000

(8) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Proxy Statement on Form 14A dated May 2, 2003

(9) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003

(10) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Proxy Statement dated July 12, 2004

(11) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated October 6, 2004

(12) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Registration Statement on Form S-3 effective as of October 13, 2004 (No. 333-119158)

(13) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated February 28, 2005

(14) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005

(15) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated August 15, 2005

(16) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated November 9, 2005

(17) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated November 10, 2005

(18) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated January 19, 2006

(19) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated February 10, 2006

(20) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated March 2, 2006

(21) Incorporated by reference to the exhibit shown in parentheses and filed with the Registrant’s Report on Form 8-K dated March 6, 2006

(22) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 10-K for the year ended December 31, 2005

(23) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2006

(24) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 10-Q for the quarter ended June 30, 2006

(25) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Information Statement dated September 18, 2006

(26) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Proxy Statement dated October 11, 2006

(27) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated October 20, 2006

155

(28) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated January 9, 2007

(29) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated January 22, 2007

(30) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated February 9, 2007

(31) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated March 12, 2007

(32) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated March 12, 2007

(33) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated April 2, 2007

(34) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 8-K dated April 13, 2007

(35) Incorporated by reference to the exhibit shown in parenthesis and filed with the Registrant’s Report on Form 10-K for the year ended December 31, 1996

(36) Filed herewith

Management employee contracts, compensatory plans and other arrangements included as part of the exhibits referred to above are as follows:

10.1	Registrant’s 1986 Non-Qualified Stock Option Plan (2)(10.1)
10.2	Registrant’s 1992 Stock Option Plan (4)(A)
10.3	Registrant’s 1992 Directors’ Stock Option Plan (4)(B)
10.4	Form of Indemnification Agreement between the Registrant, and its directors and certain of its officers (3)(A)
10.7	Second Amended and Restated Salary Continuation and Retirement Benefit Agreement dated June 30, 2000 (7)(10.32)
10.8	Registrant’s 1999 Stock Option Plan, as amended (8) (Appendix A)
10.14	Separation Agreement, dated as of September 29, 2004, by and between the Company and Jan Norelid (11) (99.2)
10.15	Letter Agreement, dated January 13, 2004, by and between Richard L. Hornsby and the Company concerning the Richard Hornsby Retirement Program (12) (10.1)
10.16	Management Services Agreement, dated August 12, 2005, by and between the Company and Royal Palm Capital Management, LLLP (14) (10.1)
10.39	2006 Incentive Compensation Plan (26) (Annex A)
10.43	Advisory Services Agreement, dated as of January 26, 2007, by and between Devcon International Corp. and Stephen J. Ruzika (29) (10.1)
10.44	Separation Agreement, dated as of February 14, 2007, by and between Devcon International Corp. and George M. Hare (30) (10.1)
10.50	V.I. Cement and Building Products Inc. 401(k) Retirement and Savings Plan (35) (10.4)

156

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 2 to its Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

February 29, 2008	DEVCON INTERNATIONAL CORP.
	BY:	/S/ RICHARD C. ROCHON
		Richard C. Rochon
		Acting Chief Executive Officer (Principal Executive Officer) and Chairman of the Board

157

EXHIBIT INDEX

Exhibit	Description
21.1	Registrant’s Subsidiaries
23.1	Consent of Berenfeld, Spritzer, Shechter & Sheer
23.2	Consent of KPMG LLP
31.1	Chief Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Chief Financial Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Chief Executive Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Chief Financial Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-21.1

Exhibit 21.1

Registrant’s Subsidiaries

Antigua Heavy Constructors, Ltd.

Bahamas Construction and Development, Ltd.

Bouwbedrijf Boven Winden, N.V.

Devcon Caribbean Purchasing Corp.

Devcon Construction & Materials Corp.

Devcon/Matrix Utility Resources, LLC

Devcon Security Holdings, Inc.

Devcon Security Services Corp.

Devcon (TCI), Ltd.

Devcon Management Corp.

DevMat Bahamas Ltd.

M21 Industries, Inc.

Mutual Central Alarm Services, Inc.

Proar Construction Materials Company, N.V.

Puerto Rico Crushing Company, Inc.

St. Maarten Masonry Products

Société des Carriers de Grand Case, S.A.R.L.

South Atlantic Dredging Corp.

Stat-Land Burglar Alarm System & Devices, Inc.

V.I. Cement and Building Products, Inc.

V.I. Excavation Equipment Rental, LLC

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Devcon International Corp and Subsidiaries:

We consent to the incorporation by reference in the registration statements listed below of Devcon International Corp. and Subsidiaries of our report dated April 16, 2007, except as to Note 2, which is as of February 25, 2008, with respect to the consolidated balance sheet of Devcon International Corp. and Subsidiaries as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive (loss) income, and cash flows for the year ended December 31, 2006, which report appears in the December 31, 2006 annual report on Form 10-K/A of Devcon International Corp. and Subsidiaries.

• Forms S-8 (Registration No. 333-113853, No. 33-59557 and No. 333-92231)

• Forms S-3 and S-3/A (Registration No. 333-119158 and No. 33-65235)

/s/ Berenfeld, Spritzer, Shechter & Sheer LLP

Certified Public Accountants

Fort Lauderdale, Florida

February 28, 2008

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Devcon International Corp.:

We consent to the incorporation by reference in the registration statements listed below of Devcon International Corp. and subsidiaries of our report dated April 15, 2006, except as to Note 1p, which is as of April 17, 2007, with respect to the consolidated balance sheets of Devcon International Corp. as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive (loss) income, and cash flows for each of the years in the two-year period ended December 31, 2005, which report appears in the December 31, 2006 annual report on Form 10-K/A of Devcon International Corp.

• Forms S-8 (Registration No. 333-113853, No. 33-59557 and No. 333-92231)

• Forms S-3 and S-3/A (Registration No. 333-119158 and No. 33-65235)

/s/ KPMG LLP

February 28, 2008

Fort Lauderdale, Florida

Certified Public Accountants

EX-31.1

Exhibit 31.1

Certifications

I, Richard Rochon certify that:

1. I have reviewed this Amendment No. 2 to the annual report on Form 10-K of Devcon International Corp.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 29, 2008

/s/ Richard Rochon

Richard Rochon

Acting Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certifications

I, Mark McIntosh certify that:

1. I have reviewed this Amendment No. 2 to the annual report on Form 10-K of Devcon International Corp.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 29, 2008

/s/ Mark McIntosh

Mark McIntosh

Chief Financial Officer

(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to

U.S.C. Section 1350,

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Amendment No. 2 to the Annual Report of Devcon International Corp. (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Rochon, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 29, 2008

/s/ Richard Rochon

Richard Rochon

Acting Chief Executive Officer

(Principal Executive Officer)

EX-32.2

Exhibit 32.2

Certification Pursuant to

U.S.C. Section 1350,

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Amendment No. 2 to the Annual Report of Devcon International Corp. (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark McIntosh, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 29, 2008

/s/ Mark McIntosh

Mark McIntosh

Chief Financial Officer

(Principal Financial and Accounting Officer)