DEVC Devcon Intl Corp (MM)

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2007

The accompanying unaudited condensed consolidated financial statements include the accounts of Devcon International Corp. and its subsidiaries (the “Company”), required to be consolidated in accordance with U.S. generally accepted accounting principles (GAAP). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the 2006 Annual Report on Form 10-K/A except for the accounting policy relating to accounting for uncertainty in income taxes, and should be read in conjunction with the consolidated financial statements and notes thereto.

The unaudited condensed consolidated financial statements for the three months ended March 31, 2007 and 2006 included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain only normal reoccurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2007, and the results of its operations and cash flows for the three months ended March 31, 2007 and 2006. Certain prior year amounts have been restated or reclassified to conform to the current period presentation.

Devcon International Corp. (the “Company”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the three months ended Match 31, 2007 (the “Original Filing”). This Amendment No. 1 is being filed to restate the Consolidated Balance Sheet as of March 31, 2007 and December 31, 2006 and the related Consolidated Statements of Operations and Cash Flows for the three months ended March 31, 2007. This Form 10-Q/A also reflects an amendment in Item 2 of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” “Other Income (Expense)” presented in the Company’s Form 10-Q for the three months ended March 31, 2007 as compared to the same period in 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 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.

a) Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that the Company determine whether the benefits of the Company’s tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. The provisions of FIN 48 also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Company did not have any unrecognized tax benefits and there was no effect on the financial condition or results of operations as a result of implementing FIN 48. The Company does not have any interest and penalties in the statement of operations for the three months ended March 31, 2007. The tax years 2004-2006 remain subject to examination by major tax jurisdictions.

b) The Company accounts for internal-use software development costs in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 98-1, “Accounting for the Cost of Software Developed or Obtained for Internal Use,” or SOP 98-1. SOP 98-1 specifies that software costs, including internal payroll costs, incurred in connection with the development or acquisition of software for internal use is charged to technology development expense as incurred until the project enters the application development phase. Costs incurred in the application development phase are capitalized and will be depreciated using the straight-line method over an estimated useful life of three years, beginning when the software is ready for use. During the three months ended March 31, 2007 and 2006, the amounts capitalized were insignificant.

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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 conversions 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.

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. At March 31, 2007, the Company had originally calculated the fair value of the embedded derivative to be $5.5 million. Based on the change in the valuation model the revised fair value of the embedded derivative at March 31, 2007 was determined to be $5.5 million, thus the balance sheet did not require an adjustment. 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. 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 dividends in accordance with the Securities Purchase Agreement. The dividends accrued for the three months ended March 31, 2007 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 unaudited condensed consolidated balance sheet as of March 31, 2007 and the unaudited condensed consolidated statement of operations for the three months ended March 31, 2007 as originally reported and as restated.

Condensed Consolidated Balance sheet:

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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 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 is evaluating the impact that the adoption of SFAS No. 159 will have on its future results of operations and financial position.

In order to finance the March 2006 Guardian acquisition, the Company 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 the Company’s common stock at an exercise price of $11.925 per share.

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 the Company’s Series A convertible preferred stock (“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. In connection with the issuance of these securities, the Company entered into a Registration Rights Agreement, under the terms of which the Company agreed to use 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 the 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 the Company failed to cause this registration statement to be declared effective by the Securities and Exchange Commission by the effectiveness deadline, registration delay payments in the amount of one percent (1.0%) of the aggregate purchase price must be paid to 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.

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On October 23, 2006, the Company 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, the Company encountered difficulties determining when all of these shares may be registered and sold by the investors. Accordingly, the Company was 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 the Company 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) the Company’s 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 Certificate of Designations is defined as a “Triggering Event” allowing the Required Holders, as defined below, to require the Company to redeem all shares of their Series A Convertible Preferred Stock by the fifth business day after transmitting notice to the Company of their desired redemption. Under the terms of the Certificate of Designations, this redemption would be effected by the Company 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 the 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. In order to be able to register a portion of these shares the Company began discussions with the investors to amend the terms of the Series A Convertible Preferred Stock in the form of an Amended Certificate of Designations.

In furtherance of these negotiations, on April 2, 2007, effective as of March 30, 2007, the Company entered into Forbearance and Amendment Agreements (the “Forbearance Agreements”) with investors constituting the “Required Holders”, i.e. investors holding a majority of the shares of the Series A Convertible Preferred Stock. Under the terms of these Forbearance Agreements, each of the Required Holders agreed that for a period of time ending no later than January 2, 2008, they shall each forbear from (a) taking any remedial action with respect to the effectiveness failure, (b) declaring the occurrence of any “Triggering Event” with respect to the effectiveness failure and from delivering any notice of redemption with respect to these matters or (c) demanding any amounts due and payable with respect to the effectiveness failure, including any registration delay payments. The Forbearance Agreements also contain agreements to amend the Certificate of Designations to revise specified terms of the Series A Convertible Preferred Stock, including 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” defined in the Certificate of Designations to provide for the Leverage Ratio to be calculated as a multiple of Performing RMR as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant set forth in the Certificate of Designations to require this 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 without being paid until the expiration of the forbearance period. The Forbearance Agreement also required the Company to withdraw the registration statement as soon as practicable. This withdrawal was effected on April 14, 2007.

If the Company is unable to obtain a permanent waiver or amendment of the registration delay payments and is unable or unwilling to pay these registration delay payments to the investors or if the Company is unable to obtain a permanent waiver or amendment of the Company’s obligation to cause the registration statement described above to be declared effective by the Securities and Exchange Commission, the investors may allege a Triggering Event under the Certificate of Designations has occurred, granting them the right to redeem the face value of the Series A Convertible Preferred Stock equaling, in the aggregate, $45,000,000 in cash plus a 15.0% premium, plus all accrued but unpaid interest and dividends (or a 15.0% premium over an amount equal to the stock price multiplied by the number of shares into which the Series A Convertible Preferred Stock is convertible, to the extent this number is higher), plus all accrued but unpaid interest and dividends.

The Company has filed a proxy statement to hold a shareholder meeting by July 1, 2007 (if the Proxy is not reviewed by the Securities and Exchange Commission, or October 1, 2007, if it is), to solicit the shareholder approval of the Amended Certificate of Designations. Upon filing of the Amended and Restated Certificate of Designations with the Secretary of the State of Florida, the Forbearance Agreement will expire. If not approved by the shareholders, the $45 million may become due upon the expiration of the Forbearance Agreement and the Company will need to arrange for alternative financing. The Company’s ability to obtain alternative financing cannot be assured at this time. See Note 18- Subsequent Events - Forbearance and Amendment Agreements.

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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.

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The Company recorded the acquisition using the purchase method of accounting. The purchase price allocation is based upon a valuation study as to fair value. Additionally, the 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 March 31, 2007, 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. The 2006 results of operations included for the acquisition are for the period March 6, 2006 to March 31, 2006, as compared to results of operations for the three months ended March 31, 2007.

The purchase price allocation is as follows:

Acquired deferred revenue results from customers who are billed for monitoring and maintenance services 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 proforma consolidated results of the Company and Guardian, as though the Company had completed this acquisition at the beginning of each period reported on:

On March 30, 2007, the Company’s Board of Directors passed a resolution which would 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. The Board resolution has provided the Company’s management with the authority and commitment to establish a plan to sell these assets which are immediately available for sale. The Company has begun to embark on a plan to identify potential buyers which we expect to finalize within one year of the date of the board resolution. Therefore, in accordance with FASB No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets (“FASB No. 144”)”, at March 31, 2007, the Company has classified the related assets as held for sale and the related operations have been treated as discontinued operations for all periods presented.

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

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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 $8.0 million, including approximately $1.7 million in notes receivable, as of March 31, 2007. 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. The Company is currently negotiating a sublease beyond 90 days with the Buyer. 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.

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 $230,367 was recorded in the three months ended March 31, 2007 upon final transfer of assets to the Purchaser. The Company established an accrued liability of $242,853 for the Deerfield lease in accordance with FASB No. 146 “Accounting for Costs Associated with Exit or Disposal Activities (“FASB No. 146”).” This accrued liability is included in other long term liabilities in the accompanying condensed consolidated balance sheet and charged to discontinued operations. The Company also accrued employee severance and retention costs in accordance with FASB No. 146. This amounted to $759,742 and the severance portion is included in accrued expense, retirement and severance and the payroll related benefits are included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheet. 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. All of these amounts were charged to discontinued operations.

As of February 28, 2007 the buyer assumed performance of the contracts transferred pursuant to the sale agreement, (i.e., all rights benefits duties and obligations for work performed after this date become the responsibility of the buyer). The Company is in the process of assigning several of these customer contracts to the buyer, and will continue to recognize revenue of these contracts during this interim period. In these cases the Buyer will be performing as a subcontractor, for which the buyer has indemnified the Company from any new contact completion risks relating to these contracts.

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.

On June 27, 2006, the Company sold its Boca-Raton-based third-party monitoring operations.

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.

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 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. 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.

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The accompanying Condensed Consolidated Statements of Operations for all the quarters presented have been adjusted to classify all non-electronic security services divisions as discontinued operations. Selected statement of operations data for the Company’s discontinued operations is as follows:

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

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.

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. At March 31, 2007, the Company was not in compliance with the fixed charge coverage ratio financial covenant of the Credit Agreement. On May 10, 2007, the Company received a waiver and the fourth amendment to the Credit Agreement which amended the fixed charge coverage ratio calculation from using interest paid in cash to accrued interest. See Note 18- Subsequent Events - Capital Source Credit Agreement.

At March 31, 2007, the Company had $11.4 million of unused facility under the Credit Agreement and zero borrowing capacity as it had violated a certain debt covenant. The effective interest on all debt outstanding was 11.08% and 11.07% for the three months ended March 31, 2007 and 2006, respectively.

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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 4th, 5th and 6th 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. For the three months ended March 31, 2007, the amortization of the discount on the Series A Convertible Preferred Stock amounted to less than $0.1 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. For the three months ended March 31, 2007, the Company amortized approximately $0.2 million of these costs. These amounts were charged to additional paid-in capital and deducted from net loss available to common shareholders. The unamortized balance of deferred financing costs at March 31, 2007 and December 31, 2006 amounted to $3.1 million and $3.3 million, respectively, and are recorded as a reduction of the carrying value of the Series A Convertible Preferred Stock in the accompanying condensed 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. 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 10-Derivative Instruments.)

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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.

The Forbearance Agreements also contain agreements to amend the governing Certificate of Designations to revise certain terms of the Series A Preferred Shares, including, without limitation, 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. 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. See Note 18 - Subsequent Events - Forbearance and Amendment Agreements. At March 31, 2007 and December 31, 2006, the Company accrued $1.1 million and $0.9 million, respectively, of dividends payable which is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. For the three months ended March 31, 2007, $1.1 million of dividends payable were declared from and charged to additional paid-in capital and deducted from net loss available to common shareholders.

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 18 - Subsequent Events - Settlement with Preferred Stockholder.

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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 was 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 for the three months ended March 31, 2006 recorded a non-cash charge amounting to $1.6 million to interest expense.

Additionally, the derivative liability amounts related to Notes 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. For the three months ended March 31, 2006, the change in the fair value of the derivative liability amounted to $1.5 million.

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 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 provide 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 March 31, 2007 and December 31, 2006 were a risk free rate of 4.65%, and volatility for the Company’s common stock of 45%. For the three months ended March 31, 2007, an expense of $1.1 million has been recorded with respect to the re-valuation of these derivatives liabilities and warrants. At March 31, 2007 and December 31, 2006, the derivative liability amounted to $5.5 million and $4.5 million, respectively, of which $0.3 million and $0.8 million related to the Warrants.

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The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted in accordance with SFAS 123R. The Company granted 15,000 stock options as of March 31, 2007 and zero as of March 31, 2006. The per share weighted-average fair value of stock options granted during 2007 was $4.15, on the grant date, using the Black-Scholes option-pricing model with the following assumptions:

The Company determined stock-based compensation cost based on fair value at the grant date for stock options under SFAS 123R. Compensation cost in the amount of $44,000 and $117,000 is included in the results of operations in the condensed consolidated financial statements for the three months ended March 31, 2007 and 2006, respectively.

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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 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 February 16, 2007, 15,000 options were granted to directors, officers and employees under the 2006 Plan.

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.

A summary of stock option activity is as follows for the three months ended March 31, 2007:

At March 31, 2007, there was approximately $220,997 of total unrecognized compensation cost related to unvested stock options granted under our stock option plan. This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.83 years.

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In February 2006, one of the Company’s Antiguan subsidiaries declared and paid a $3.6 million gross dividend, of which $1.2 million was withheld for Antiguan withholding taxes. The withholding taxes were deemed paid by utilization of a portion of a $7.5 million tax credit received as part of a Satisfaction Agreement which was entered into between the Company, its Antiguan subsidiaries and the Government of Antigua and Barbuda in December of 2004. Accordingly, in the first quarter of 2006, the Company recognized a non–cash foreign tax expense in the amount of $ 1.2 million, which was offset by deferred tax benefit of $0.6 million associated with a net operating loss generated by the Company’s construction operations in the Virgin Islands and the utilization of a $0.6 million foreign tax credit.

For the three months ending March 31, 2007 the Company realized a tax benefit of $0.6 million for continuing operations. The benefit was due to an increase in the deferred tax assets of $2.1 million that was offset by an increase in the valuation allowance of $1.5 million. Tax expense for discontinued operations was zero for the three months ending March 31, 2007.

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. The board resolution to discontinue all non-security services businesses eliminated the requirement to disclose segment operations as the Company’s only segment will be the electronic security services division.

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.

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”). These assets were sold to BitMar, Ltd, a Turks and Caicos corporation and a successor-in-interest to Tiger Oil, Inc., a Florida corporation. Donald L. Smith Jr., the Company’s former Chairman and Chief Executive Offer and a current director of the Company and Donald L. Smith III, a former officer of the Company, are principals of BitMar, Ltd. (See Note 7-Discontinued Operations)

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

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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 paid in cash. 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.

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. The net present value of the future obligation was estimated at $253,844 and $276,933 at March 31, 2007 and at December 31, 2006, respectively. These amounts are included in Retirement and Severance in the accompanying condensed consolidated balance sheet.

The Company has an on-going Management Services Agreement, (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”) who has 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 effective January 22, 2007. 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 from February 16, 2007 through May 1, 2007, as a result of the resignation of George Hare. In addition, the Company leases certain office space to Royal Palm.

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. Rent expense amounted to $19,875 and $23,850 for the three months ended March 31, 2007 and 2006, respectively.

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Comprehensive income presents a measure of all changes in shareholders’ equity except for changes resulting from transactions with shareholders in their capacity as shareholders. The following table provides a reconciliation of net loss as reported in the condensed consolidated Statements of Operations to comprehensive loss.

Commitments

Resignation of Chief Executive Officer. On January 22, 2007, Mr. Stephen J. Ruzika resigned as Chief Executive Officer of the Company. On January 26, 2007, the Company entered into an Advisory Services Agreement with Mr. Ruzika, which became effective on January 22, 2007. 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. On February 14, 2007, the Company entered into a Separation Agreement with Mr. Hare outlining the terms of his separation from the Company, as well as a consulting arrangement pursuant to which Mr. Hare would be available to the Company in a consulting capacity.

At March 31, 2007 the Company recorded a charge of approximately $225,000 which represented the total liability related to both of these agreements.

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Legal Matters

Series A Convertible Preferred Stockholder

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 the Company 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 the Company the option of accepting certain restructuring terms which it 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.

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, the Company does not believe that the outcome will have a material adverse effect on the consolidated financial position, results of operations or its cash flows.

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.

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

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 May 16, 2007, 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.

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 several 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. During the first quarter of 2007, there were no mining operations and sales of mined aggregate to third parties was ceased. 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 quarry and 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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On April 26, 2007, the Civil Court of Basse-Terre rendered its decision in the framework of the procedure on the merit concerning the completion of the sale of the real property subject to the 2 Hectare Option. The court decision mainly provides that:

- SCGC validly exercised the 2 Hectare Option;

- the sale of the real property shall be completed under the conditions provided for in the 2 Hectare Option dated as of February 2005 and therefore the Civil Court appoints the chairman of the Notary chamber of Guadeloupe with a view to (i) preparing a draft deed of sale in accordance with the provisions of the 2 Hectare Option within 30 days as from the requirement made by the most diligent party and (ii) inviting the parties for the execution of the deed of sale within 30 days as from the delivery of his draft deed to the parties;

- the notary (SCP Mouial, Ricour-Brunier, Balzame, Jacques-Richardson and Herbert) is prevented from releasing the $1 million currently placed in escrow otherwise than to the benefit of the abovementioned notary;

- Petit shall attend the closing meeting as requested by said notary and execute the deed of sale so prepared. Otherwise a penalty of € 500 per day for delay would have to be paid by Petit;

- as a consequence of the exercise of the option to purchase, the 15 Hectare Lease is renewed until June 30, 2010; and

- Petit shall pay to SCGC an amount of € 7,000 in accordance with Article 700 of the French Civil Procedure Code.

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.

(18) SUBSEQUENT EVENTS

On April 27, 2007, Mr. Lakey resigned from his position as the Company’s Chief Operating Officer and President — Construction and Materials and entered into an Advisory Services Agreement (the “Advisory Services Agreement”) with the Company, which became effective on such date. The Advisory Services Agreement outlined the terms of his separation from the Company as well as a consulting arrangement pursuant to which Mr. Lakey would remain involved with the Company in an advisory capacity. The Company expects to record a charge of approximately $104,000 related to this agreement.

On May 1, 2007, the Board of Directors of the Company appointed Mr. Robert C. Farenhem to the position of President of the Company and appointed Robert W. Schiller, the Company’s former Vice President-Finance, to the position of Chief Financial Officer of the Company.

“ 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 Convertible 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 “Part II. Other Information—Item 1—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 “Part II. Other Information—Item 1—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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