COMMAND SECURITY CORP (Form: 10-K, Received: 06/28/2006 14:43:16)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

^{______________}

(Mark One)

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

For the fiscal year ended March 31, 2006

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

For the transition period from to

^{Commission file number} ^0-18684

^{______________}

COMMAND SECURITY CORPORATION

^{(Exact Name of Registrant as Specified in Its Charter)}


New York		14-1626307
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

Lexington Park
Lagrangeville, New York 12540

(Address of Principal Executive Offices)(Zip Code)

Registrant’s Telephone Number, Including Area Code: (845) 454-3703

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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value

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

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 ý

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 ý 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 the 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.


Large Accelerated Filer ¨	Accelerated Filer ¨	Non-Accelerated Filer ý

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

The aggregate market value of common stock held by non-affiliates of the registrant as of June 20, 2006 was approximately $10,164,970.

As of June 20, 2006, the registrant had issued and outstanding 10,137,970 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated by reference into Part III hereof from the registrant’s proxy statement for its 2006 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days of the close of the registrant’s fiscal year ended March 31, 2006.

COMMAND SECURITY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2006

TABLE OF CONTENTS


		Page

	PART I
1.	Business	1
1A.	Risk Factors	4
1B.	Unresolved Staff Comments	6
2.	Properties	6
3.	Legal Proceedings	8
4.	Submission of Matters to a Vote of Security Holders	9

	PART II
5.	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	10
6.	Selected Financial Data	10
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
7A.	Quantitative and Qualitative Disclosures About Market Risk	18
8.	Financial Statements and Supplementary Data	19
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	19
9A.	Controls and Procedures	19
9B.	Other Information	19

	PART III
10.	Directors and Executive Officers of the Registrant	20
11.	Executive Compensation	20
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	20
13.	Certain Relationships and Related Transactions	20
14.	Principal Accountant Fees and Services	20

	PART IV
15.	Exhibits, Financial Statement Schedules	21

PART I

Item 1. Business.

General

Command Security Corporation (the “Company”) principally provides uniformed security officers, aviation and support security services to commercial, financial, industrial, aviation and governmental clients in the United States from its 28 operating offices in California, Connecticut, Delaware, Florida, Illinois, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon and Pennsylvania.

The Company operates as a provider of security services to a wide range of clients that the Company has categorized into three groups; security services, aviation services and support services. The latter includes services provided to security services firms under administrative service agreements and back office support services provided to police departments.

The security services division provides its services to governmental, quasi-governmental, health, educational and financial institutions, residential and commercial property management companies, and industrial, distribution, logistics and retail clients. Security services generated approximately $29.3 million, or 34.4%, of the Company’s revenues for the fiscal year ended March 31, 2006. Security services include providing armed and unarmed uniformed security personnel for access control, mobile patrols, traffic control, security console/system operators, fire safety directors, communication, reception, concierge and front desk/doorman operations.

The aviation services division provides its services to airlines, airports, airport authorities and the general aviation community. Aviation services generated approximately $55.6 million, or 65.2%, of the Company’s revenues for the fiscal year ended March 31, 2006. Aviation services include providing uniformed security services to airport and airport-related clients, including document verifiers, skycaps, wheelchair escorts, general security and baggage handling services.

The support services division provides its services to security services firms and police departments. Support services generated approximately $.4 million, or .4%, of the Company’s revenues for the fiscal year ended March 31, 2006 and encompass back office support to three police departments and two administrative service clients.

Operations

As a licensed watch guard and patrol agency, the Company’s security services division furnishes security officers to its security service customers to protect people or property and to prevent the theft of property. In this regard, the Company principally conducts business by providing security officers and other personnel who are, depending on the particular requirements of the customer, uniformed or plain-clothed, armed or unarmed, and who patrol in marked radio cars or stand duty on the premises at stationary posts such as fire stations, reception areas or video monitors. The Company’s security officers maintain contact with headquarters or supervisors via car radio, hand-held radios or cell phones. In addition to the more traditional tasks associated with access control and theft prevention, security officers respond to emergency situations and report to appropriate authorities for fires, natural disasters, work accidents and medical crises.

The Company provides security services to many of its industrial, commercial and residential property management customers on a 24-hour basis, 365 days per year. For these customers, security officers are on hand to provide plant security, access control, personnel security checks and traffic and parking control and to protect against fire, theft, sabotage and safety hazards. Our remaining customers include retail establishments, hospitals and governmental units. The services provided to these customers may require armed as well as unarmed guards. The Company also provides specialized vehicle patrol and inspection services and personal protection services to key executives and high profile personalities from time to time.

The Company’s aviation services division provides a variety of uniformed services for domestic and international air carriers, including aircraft security, access control, wheelchair escorts, skycaps, baggage handlers and uniformed security officers for cargo security areas. Recently, the Company’s Aviation division has been successful in obtaining four new service contracts, three of which represent new airport locations for such division. Two of these new service contracts commenced in the first quarter of calendar 2005, one commenced in November 2005 and the most recent commenced in May 2006.

The nature of the Company’s business subjects it to claims or litigation alleging that it is liable for damages as a result of the conduct of its employees or others. The Company insures against such claims and suits through general liability policies with third-party insurance companies. Such policies have limits of $5,000,000 per occurrence. On the aviation related business, the Company currently has a policy with a $30,000,000 limit per occurrence. The Company retains the risk for the first $25,000 per occurrence on the non-aviation related policy which includes airport wheelchair operations and $5,000 on the aviation related policy except $25,000 for damage to aircraft and $100,000 for skycap and electric cart operations.

To ensure that adequate protection requirements have been established prior to commencing service to a customer, the Company evaluates the customer’s site and prepares a recommendation for any required changes to existing security programs or services. Surveys typically include an examination and evaluation of perimeter controls, lighting, personnel and vehicle identification and control, visitor controls, electronic alarm reporting systems, safety and emergency procedures, key controls and security force manning levels. While surveys and recommendations are prepared by the Company, the security plan and coverage requirements are determined by the customer. Operational procedures and individual post orders are reviewed and/or rewritten by the Company to meet the requirements of the security plan, and coverage as determined by the customer.

In order to provide a high level of service without incurring large overhead expenses, the Company frequently establishes offices close to its customers and delegates responsibility and decision making to its local managers. The Company’s managers each play an important role as highlighted by their responsibility for both service quality and sales. The Company believes that, in most situations, providing a single individual with responsibility for service quality and sales results in better supervision, quality control and greater responsiveness to customer needs.

The Company generally renders its security services pursuant to a standard form security services agreement which specifies the personnel and/or equipment to be provided by the Company at designated locations and the applicable rates, which typically are hourly rates per person. Rates vary depending on base, overtime and holiday time worked, and the term of engagement. The Company assumes responsibility for a variety of functions, including scheduling for each customer site, paying all security officers and providing uniforms, training, equipment, supervision, fringe benefits and workers’ compensation insurance. These security services agreements also provide customers with flexibility by permitting reduction or expansion of the security force on relatively short notice. The Company is responsible for preventing the interruption of security services as a consequence of illness, vacations or resignations. In most cases the customer also agrees not to hire any security personnel used by the Company for at least 180 days after the termination of the engagement. Each security services agreement may be terminated by the customer or the Company, typically with not less than thirty days written notice. In addition, the Company may also terminate an agreement immediately upon default by the customer in payment of monies due thereunder, or if the customer is involved in a bankruptcy or similar event.

The Company has its own proprietary computerized scheduling and information system. The scheduling of security officers, while time-consuming, is an important function of any security services company. Management believes the system substantially reduces the time a manager must spend on scheduling daily security officer hours and allows the Company to fulfill customer needs by automatically selecting those security officers that fit the customer’s requirements.

Employee Recruitment and Training

The Company believes that the quality of its security officers is essential to its ability to offer effective and reliable service, and it believes diligence in their selection and training produces the level of performance required to maintain customer satisfaction.

The Company’s corporate policy requires that all selected applicants for security officer positions undergo a detailed pre-employment interview and a background investigation covering such areas as employment, education, military service, medical history and, subject to applicable state laws, criminal record. In certain cases the Company employs psychological testing. Personnel are selected based upon the Company’s evaluation of their physical fitness, maturity, experience, personality, stability and reliability. Medical examinations and substance abuse testing may also be performed. Preference is given to applicants with previous experience, either as a military or a civilian security-police officer.

The Company trains accepted applicants in three phases; pre-assignment, on-the-job and refresher training. Pre-assignment training covers topics such as the duties and powers of a security officer, report preparation, emergency

procedures, general orders, regulations, grounds for discharge, uniforms, personal appearance and basic post responsibilities. On-the-job assignment training covers specific duties as required by the post and job orders. Ongoing refresher training is given on a periodic basis as determined by the local area supervisor and manager.

The Company treats all employees and applicants for employment without unlawful discrimination as to race, creed, color, national origin, sex, age, disability, marital status or sexual orientation in all employment-related decisions.

Significant Customers

For the fiscal year ended March 31, 2006, Delta Airlines (“Delta”) accounted for approximately $14,300,000, or 17%, of the Company’s total revenues.

Several of the Company’s aviation clients filed for bankruptcy protection during fiscal 2006 and 2005. The aviation industry continues to struggle with various challenges including the cost of security and higher fuel prices. Additional bankruptcy filings by aviation and non-aviation clients could have a material adverse impact on the Company’s liquidity, results of operations and financial condition.

Competition

Competition in the security service business is intense. It is based primarily on price, quality of services provided, scope of services performed, name recognition, recruiting, training and the extent and quality of security officer supervision. As the Company has expanded its operations it has had to compete more frequently against larger national companies, such as Securitas North America, the Wackenhut Corporation, AlliedBarton Security and Guardsmark, LLC, which have substantially greater financial resources, personnel and facilities than the Company. These competitors also offer a range of security and investigative services which are at least as extensive as and directly competitive with, those offered by the Company. In addition, the Company competes with numerous regional and local organizations which offer substantially all of the services provided by the Company. Although management believes that, especially with respect to certain of its markets, the Company enjoys a favorable competitive position because of its emphasis on customer service, supervision and training and is able to compete on the basis of the quality of its service, personal relationships with customers and reputation, there can be no assurance that it will be able to maintain its competitive position in the security industry.

Government Regulation

The Company is subject to city, county and state firearm and occupational licensing laws that apply to security officers and private investigators. In addition, many states have laws requiring training and registration of security officers, regulating the use of badges and uniforms, prescribing the use of identification cards or badges, and imposing minimum bond, surety or insurance standards. The Company may be subjected to penalties or fines as the result of licensing irregularities or the misconduct of one of its security officers from time to time in the ordinary course of its business. Management believes the Company is in material compliance with all applicable laws and regulations.

Employees

The Company has approximately 60 employees indirectly attributable to security services, including supervisors and dispatchers, 90 administrative employees, including the executive staff, and 3,250 hourly security personnel.

The Company’s business is labor intensive and, as a result, is affected by the availability of qualified personnel and the cost of labor. Although the security services industry is characterized by high turnover, the Company has not experienced any material difficulty in hiring suitable numbers of qualified security officers, although, when labor has been in short supply, it has been required to pay higher wages and/or incur overtime charges.

Approximately 35% of the Company’s employees do not belong to a labor union. Some of the Company’s employees in the following locations are members of unions: Chicago and New York City security services offices; and John F. Kennedy, La Guardia, Los Angeles and Philadelphia airport offices. Together, the unionized employees account for approximately 65% of the Company’s employees and work under collective bargaining agreements with the following unions: Allied International Union, Allied Services Division of the Transportation Communications International Union and Special & Superior Officers Benevolent Association. Many of the Company’s Chicago,

Los Angeles and New York City competitors are also unionized. The Company has experienced no work stoppages attributable to labor disputes. The Company believes that its relations with its employees are satisfactory. Security officers and other personnel supplied by the Company to its customers are employees of the Company, even though they may be stationed regularly at the customer’s business premises.

Service Marks

The Company believes itself to be the owner of the service marks “Command Security Corporation”, “CSC” and “CSC Plus” design for security officer, detective, private investigation services and security consulting services.

The Company also believes itself to be the owner of the trademark “Smartwheel” for the computer program for use in dispatching and tracking small vehicles such as carts and wheelchairs at transportation terminals. The trademark was acquired as part of United Security Group, Inc. acquisition. In addition, the Company believes itself to be the owner of the service marks “STAIRS” and “Smart Guard.”

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition or future results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Airline Industry Concerns

Acquisitions

Our acquisition strategy entails numerous risks. The pursuit of acquisition candidates is expensive and may not be successful. Our ability to complete future acquisitions will depend on our ability to identify suitable acquisition candidates, negotiate acceptable terms for their acquisition and, if necessary, finance those acquisitions, in each case, before any attractive candidates are purchased by other parties, some of whom may have greater financial and other resources than us. Whether or not any particular acquisition is closed successfully, each of these activities is expensive and time consuming and would likely require our management to spend considerable time and effort to accomplish them, which would detract from their ability to run our current business. Although we may spend considerable expense and effort to pursue acquisitions, we may not be successful in closing them.

Competition

The Company’s assumptions regarding projected results depend largely upon the Company’s ability to retain substantially all of its current clients. Retention is affected by several factors including, but not limited to, regulatory limitations, the quality of the services provided by the Company, the quality and pricing of comparable services offered by competitors, continuity of management and non-management personnel. There are several major national competitors with resources greater than those of the Company which, therefore, have the ability to provide more attractive service, cost and compensation incentives to clients and employees than those provided by the Company. Our ability to gain or maintain sales, gross margins and/or employees may be limited as a result of actions by competitors.

Changes in Accounting Standards and Taxation Requirements

New accounting standards or pronouncements that may become applicable to our Company from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results for the affected periods. We are also subject to income tax and various business taxes in the numerous jurisdictions in which we generate revenues. Increases in income or business tax rates could reduce our after-tax results from affected jurisdictions in which we operate.

Collective Bargaining Agreements

Many of our employees at our operating locations are covered by collective bargaining agreements. If we are unable to renew such agreements on satisfactory terms, our labor costs could increase, which would affect our gross margins. In addition, strikes or work stoppages at our locations could impair our ability to provide contracted services to our customers, which would reduce our revenues and could expose us to customer claims.

Consulting Agreement with Giuliani Security & Safety

In January 2006, the Company entered into a consulting agreement (the “Consulting Agreement”) with Giuliani Security & Safety LLC (“Giuliani Security”) to provide a broad range of guidance and assistance to the Company to help grow its business in the areas of security, crisis management, fire and life safety and counterterrorism. As compensation for Giuliani Security’s performance of its obligations under the Consulting Agreement, the Company has agreed to pay Giuliani Security a monthly cash fee during the term of the engagement of one hundred seventy five thousand dollars ($175,000). The Consulting Agreement has a term of one year. Management expects that fees paid under the Consulting Agreement will have a negative impact on the Company’s future results of operations which will diminish over time as and to the extent that benefits derived from the engagement begin to be realized by the Company.

Cost Management

The Company’s ability to realize expectations will be largely dependent upon management and its ability to maintain gross margins, which in turn will be determined in large part by management’s control over costs and increased pressure on its vendors to cut their costs. To a significant extent, certain costs are not within the control of management and margins may be adversely affected by such items as litigation expenses, fees incurred in connection with extraordinary business transactions, inflation, labor unrest, increased payroll and related costs.

Collection of Accounts Receivable

Management has no definite basis to believe that default in payment of accounts receivable by the Company’s aviation and security services customers or administrative service clients will occur. However, the aviation industry in general poses a high degree of risk. Any such default by one or more significant clients due to bankruptcy or otherwise could have a material adverse impact on the Company’s liquidity, results of operations and financial condition.

Loss of a Large Customer

Our success depends in part upon the retention of our large security and aviation services customers. In general, security services companies such as ours face the risk of losing customers as a result of a contract expiration, merger or acquisition, business failure or the selection of another provider of security services. We generate a significant portion of our revenues from large airline and security services customers some of which are experiencing substantial financial difficulties. We cannot assure you that we will be able to retain long-term relationships or secure renewals of short-term relationships with our customers in the future.

Loss of Key Management Personnel

Our success depends upon the talents and efforts of key management personnel, several of whom have been with our company or our industry for decades, including Barry I. Regenstein, Martin C. Blake, Jr., Jeffrey Edmiston and Debra M. Miller. The loss of any such management personnel, due to retirement or otherwise, and the inability to attract and retain highly qualified technical and management personnel in the future, could have a material adverse effect on our business, financial condition and results of operations.

Information Systems

We are increasingly dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information. In particular, we depend on our information technology infrastructure for electronic communications among our locations around the country and between Company personnel and our customers and suppliers. Security breaches of this infrastructure can create disruptions, shutdowns

or unauthorized disclosure of confidential information. If we are unable to prevent such breaches, our operations could be disrupted or we may suffer financial damage or loss because of lost or misappropriated information.

Regulation

The Company’s management assumes that the current regulation and federalization of pre-board screening services provided by the Company will not be expanded into other areas such as general security and baggage handling at aviation facilities. Such increased regulation or federalization would have a material adverse impact on the Company’s results of operations and financial condition.

Catastrophic Events

The Company is exposed to potential claims for catastrophic events, such as acts of terrorism, or based upon allegations that the Company failed to perform its services in accordance with contractual or industry standards. The Company’s insurance coverage limits are currently $5,000,000 and $30,000,000 per occurrence for guard and aviation services, respectively. The Company retains the risk for the first $25,000 per occurrence on the non-aviation related policy which includes airport wheelchair operations and $5,000 on the aviation related policy (except $25,000 for damage to aircraft and $100,000 for skycap and electric cart operations). The Terrorism Risk Insurance Act of 2002 established a program within the United States Department of the Treasury, under which the federal government shares, with the insurance industry, the risk of loss from future “acts of terrorism,” as defined in the Act. The Company does not currently maintain additional insurance coverage for losses arising from “acts of terrorism”.

These are representative of the factors that could affect our future financial position and results of operations, and cause our actual performance to differ from the forward-looking statements we have made herein, and in our other publicly filed documents and statements. In addition, our financial position and operating results could be affected by general industry and market conditions and growth rates, general economic conditions, including interest rate fluctuations and other factors. Additional detailed information concerning a number of factors that could cause actual results to differ materially from the information contained herein is readily available in the Company’s most recent reports on Forms 10-K, 10-Q and 8-K and any amendments thereto (all as filed with the Securities and Exchange Commission from time to time).

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

As of March 31, 2006, the Company owned and used approximately 45 vehicles in connection with its business.

As of March 31, 2006, the Company did not own any real property. The Company occupies executive offices at Route 55, Lexington Park, Lagrangeville, New York, consisting of approximately 6,600 square feet with a base annual rental of $105,600 under a five-year lease expiring September 30, 2010. The Company also leases the following offices:


Location

2450 S. Atlantic Blvd. Suites #206-207 Commerce, CA

8939 S. Sepulveda Blvd. Suite #201 Los Angeles, CA

7841 Balboa Avenue Suite 208 San Diego, CA


Location

San Jose Int’l. Airport 1400 Coleman Ave. Suites D24 & D25 Santa Clara, CA

100 Wells St. #2A Hartford, CT

2777 Summer Street Suite 208A Stamford, CT

Suite 208 Wilson Bldg. 3511 Silverside Road Concord Plaza Wilmington, DE 19810

4901 N.W. 17th Way Suite 505 Ft. Lauderdale, FL

800 Virginia Avenue Suite 53 Ft. Pierce, FL

8181 NW 36th Street Unit #21-A Miami, FL

8452 South Stony Island 2nd Floor Chicago, Illinois

Portland International Airport 1001 Westbrook Street Portland, ME

780 Elkridge Landing Road Suite 220 Linthicum Heights, MD

21 Cummings Park Suite 224 Woburn, MA

186 Stafford St Springfield, MA

2222 Morris Avenue Union, NJ

52 Oswego Road Baldwinsville, NY


Location

2144 Doubleday Avenue Ballston Spa, NY

Laguardia Int’l. Airport United Hangar #2, Rooms 328 & 329 Flushing, NY

JFK International Airport 175-01 Rockaway Boulevard Jamaica, NY

17 Battery Place Suite 223 New York, NY

22 IBM Road Suite 105 Poughkeepsie, NY

Two Gannett Drive Suite 208 White Plains, NY

5505 Main Street Suite 2 Williamsville, NY

700 NE Airport Way Suite B2420 Portland, OR

29 Bala Avenue Suite 118 Bala Cynwyd, PA

2 International Plaza Suite 242 Philadelphia, PA

Pittsburgh International Airport Ticketing Level of the Landside Terminal Building Pittsburgh, PA

We believe that our existing properties are in good condition and are suitable for the conduct of our business.

Item 3. Legal Proceedings.

Except as described below, the Company is not a party to any material pending proceedings, other than ordinary routine litigation incidental to its business.

The nature of the Company’s business subjects it to claims or litigation alleging that it is liable for damages as a result of the conduct of its employees or others. Except for such litigation incidental to its business, other claims or actions that are not material and the lawsuits described below, there are no pending legal proceedings to which the Company is a party or to which any of its property is subject.

maintains general liability and workers’ compensation insurance coverage that it believes is appropriate to the relevant level of risk and potential liability. Some of the claims brought against the Company could result in significant payments; however, the exposure to the Company under general liability is limited to the first $25,000 per occurrence on the non-aviation and airport wheelchair operations related claims and $5,000 per occurrence on the aviation related claims except $25,000 for damage to aircraft and $100,000 for skycap and electric cart operations. Any punitive damage award would not be covered by the general liability insurance policy. The only other potential impact would be on future premiums, which may be adversely affected by an unfavorable claims history.

In addition to such cases, the Company has been named as a defendant in several uninsured employment related claims which are currently before various courts, the EEOC or various state and local agencies. The Company has instituted policies to minimize these occurrences and monitor those that do occur. At this time, the Company’s management does not believe that the outcome that any of these claims may have, should the investigations conclude that they are valid, will have a material adverse effect on the financial position of the Company.

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

No matters were submitted to a vote of our security holders during the last quarter of our fiscal year ended March 31, 2006.

PART II

Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s stock is quoted on the OTC Bulletin Board Service, under the symbol “CMMD.OB.” The Company intends to continue to comply with all capital reporting requirements of the Securities and Exchange Commission.

The following table sets forth, for the calendar periods indicated, the high and low sales price for the Common Stock as reported by the OTC Bulletin Board Service, for each full quarterly period within the two most recent fiscal years.


	Common Stock Market Price
Last Sales Price Period(1)	High		Low

2006
First Quarter	$	2.05	$	1.20
Second Quarter		3.42		1.76
Third Quarter		2.30		1.65
Fourth Quarter		2.90		1.75

2005
First Quarter	$	1.69	$	1.12
Second Quarter		1.70		1.21
Third Quarter		1.38		1.05
Fourth Quarter		2.20		1.31

——————

(1)

Reflects fiscal years ended March 31 of the year indicated.

The above quotations do not include retail mark-ups, markdowns or commissions and represent prices between dealers and not necessarily actual transactions. The past performance of the Company’s securities is not necessarily indicative of future performance.

As of June 20, 2006 there were approximately 1,000 holders of the Company’s common stock. The last sales price of the Company’s common stock on June 20, 2006 was $2.40.

The Company has never paid cash dividends on its common stock. Payment of dividends on common stock, if any, will be within the discretion of the Company’s Board of Directors and will depend, among other factors, on approval of its principal lender, earnings, capital requirements and the operating and financial condition of the Company. At present, the Company’s anticipated capital requirements are such that it intends to follow a policy of retaining earnings, if any, in order to finance, in part, the development of its business.

Item 6. Selected Financial Data.

The financial data included in this table has been derived from the financial statements as of and for the fiscal years ended March 31, 2006, 2005, 2004, 2003 and 2002, which have been audited by independent certified public accountants. The information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the financial statements and related notes included in the Report.


	Statements of Operations Data Years Ended March 31,
In $ Thousands	2006		2005		2004		2003	2002

Revenue	85,209		79,655		75,905		94,315	84,162
Gross profit	11,420		10,523		10,960		19,558	13,805
Operating income (loss)	8		(289	)	195		3,266	1,752
Net income (loss)	(100	)	(390	)	(310	)	1,327	2,376
Income (loss) per common share	(.01	)	(.06	)	(.08	)	0.14	0.38
Weighted average number of common shares	8,834,952		7,302,738		6,287,343		6,287,343	6,287,343

All of the above statistics are in $ thousands except for “Income (loss) per common share” and “Weighted average number of common shares” outstanding which are expressed in $’s and number, respectively.


	Balance Sheet Data At March 31,
In $ Thousands	2006	2005	2004	2003	2002

Working capital	6,838	3,679	2,549	3,591	1,525
Total assets	18,113	16,511	21,927	20,707	26,317
Short-term debt(1)	3,475	4,866	9,519	9,248	13,570
Long-term debt(2)	57	81	221	88	291
Stockholders’ equity	7,625	4,409	4,494	4,967	4,087

——————

(1)

The Company’s short-term debt includes the current maturities of long-term debt, obligations under capital leases and short term borrowings. See Notes 8, 9 and 17, “Short-Term Borrowings”, “Long-Term Debt” and “Lease Commitments”, respectively, to the financial statements for further discussion.

(2)

The Company’s long-term debt includes the long-term portion of obligations under capital leases.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s financial statements and related notes thereto contained in this report. In this discussion, the words “Company”, “we”, “our” and “us” refer to Command Security Corporation.

The following can be interpreted as including forward-looking statements under the Private Securities Litigation Reform Act of 1995. The words “outlook”, “intend”, “plans”, “efforts”, “anticipates”, “believes”, “expects” or words of similar import typically identify such statements. Various important factors that could cause actual results to differ materially from those expressed in the forward-looking statements are identified at the end of this Item 7. The Company’s actual results may vary significantly from the results contemplated by these forward-looking statements based on a number of factors including, but not limited to, availability of labor, marketing success, competitive conditions and the change in economic conditions of the various markets the Company serves.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.

Revenue Recognition

The Company records revenues as services are provided to its customers. Revenues consist primarily of aviation and security services which are typically billed at hourly rates. These rates may vary depending on base, overtime and holiday time worked. Revenue for administrative services provided to other security companies are calculated as a percentage of the administrative service client’s revenue and are recognized when billings for the related security services are generated.

Trade Receivables

The Company periodically evaluates the requirement for providing for billing adjustments and/or credit losses on its accounts receivable. The Company provides for billing adjustments where management determines that there is a likelihood of a significant adjustment for disputed billings. Criteria used by management to evaluate the adequacy of the allowance for doubtful accounts include, among others, the creditworthiness of the customer, current trends, prior payment performance, the age of the receivables and the Company’s overall historical loss experience. Individual accounts are charged off against the allowance as management deems them as uncollectible.

Insurance Reserves

General liability estimated accrued liabilities are calculated on an undiscounted basis based on actual claim data and estimates of incurred but not reported claims developed utilizing historical claim trends. Projected settlements and incurred but not reported claims are estimated based on pending claims, historical trends and data.

Workers’ compensation annual premiums are based on the incurred losses as determined at the end of the coverage period, subject to minimum and maximum premium. Estimated accrued liabilities are based on the Company’s historical loss experience and the ratio of claims paid to the Company’s historical payout profiles.

Income Taxes

Income taxes are based on income (loss) for financial reporting purposes and reflect a current tax liability (asset) for the estimated taxes payable (recoverable) in the current year tax return and changes in deferred taxes. Deferred tax assets or liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax laws and rates. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.

Accounting for Stock Options

In December 2002 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure”, an amendment of SFAS No. 123, (“SFAS 123”), “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. Since SFAS 148 was adopted during fiscal year ended March 31, 2003, the Company could elect to adopt any of the three transitional recognition provisions. The Company adopted the prospective method of accounting for stock-based compensation. The adoption of SFAS 148 resulted in a non-cash charge of $19,600 for stock compensation cost for the three months ended June 30, 2005.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values at grant date and the recognition of the related expense over the period in which the share-based compensation vest. The Company was required to adopt the provisions of SFAS 123R effective July 1, 2005 and use the modified-prospective transition method. Under the modified-prospective method, the Company recognizes compensation expense in the financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after July 1, 2005. The adoption of SFAS 123R resulted in a non-cash charge of $377,750 for stock based compensation for the nine months ended March 31, 2006. Such non-cash charge would have been the same under the provisions of SFAS 148.

Overview

We provide uniformed security services from our twenty-eight operating offices in twelve states throughout the United States. In reaction to the many challenges facing the airline industry currently, we have had to cut back our cost base to attempt to remain profitable. In light of current world conditions, we expect that security will continue to be a key area of focus both domestically in the United States and internationally.

Results of Operations

Earnings

The Company reported a net loss for the fiscal year ended March 31, 2006 of $99,595. The loss reflects, among other items,: (i) an additional provision for bad debts of $850,000 related to the filing by Delta Air Lines and Northwest Airlines of voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and
(ii) approximately $560,000 of professional fees and a non-cash charge of $280,000 for stock compensation costs both of which relate primarily to the Company entering into a consulting agreement with Giuliani Security & Safety LLC, a leading security consulting firm.

In fiscal year 2005, the Company reported a net loss of $390,255. The loss included approximately $685,000 of costs incurred by the Company in connection with: (i) the change in the Company’s management and Board of Directors in August 2004, and related legal fees and (ii) the payment by the Company of certain legal fees and expenses primarily in connection with the conversion of the Company’s preferred stock into common stock by certain shareholders.

Revenues

Revenues for the fiscal year ended March 31, 2006 increased by $5,553,871, or 7.0%, to $85,208,615 from $79,654,744 in fiscal year 2005. The increase is primarily due to higher revenues of approximately $5,100,000 in the aviation division from: (i) new and existing airline customers at the Company’s terminal operations at John F. Kennedy International Airport in New York, Baltimore/Washington International Airport in Maryland and Los Angeles International Airport in California and (ii) new contracts which commenced in January and November 2005 with groups of airlines at new airport locations in Portland, Maine and Pittsburgh, Pennsylvania. In addition, the security services division experienced higher revenues of approximately $400,000 due mainly to rate increases with existing customers as well as a net growth in new customers.

Revenues for the fiscal year ended March 31, 2005 increased by $3,749,962, or 4.9%, to $79,654,744 from $75,904,782 in fiscal year 2004. The increase was primarily due to higher revenues of approximately $7,500,000 in the aviation division from: (i) a contract with Delta Air Lines which commenced in August 2003 and (ii) new airline customers at the Company’s existing terminal operations at John F. Kennedy International Airport in New York and Los Angeles International Airport in California. The increase was partially offset by lower revenues of approximately $4,200,000 due to the losses in the prior year of: (i) a wheelchair contract at Los Angeles International Airport; (ii) temporary security guard strike work associated with a California based grocery market chain and (iii) an escort program transporting international passengers without United States visas within terminals at certain of the Company’s airport locations.

Gross Profit

Gross profit for the fiscal year ended March 31, 2006 increased by $897,833 to $11,420,359 (13.4% of revenues) from $10,522,526 (13.2% of revenues) for fiscal year 2005. The increase was due mainly to: (i) expanded services with new and existing customers as noted above and (ii) lower workers’ compensation and automotive insurance costs. Partially offsetting these increases were increased labor and related costs associated with the Company’s security services division.

Gross profit for the fiscal year ended March 31, 2005 decreased by $437,143 to $10,522,526 (13.2% of revenues) from $10,959,669 (14.4% of revenues) for fiscal year 2004. The decrease was due mainly to: (i) the loss of temporary security guard strike work with a California based grocery market chain; (ii) higher state unemployment insurance rates as a result of layoffs of personnel in 2003 due to the federalization of aviation pre-board screening services; (iii) term discounts with airline customers for prompt payment of accounts receivable; (iv) lower gross profit margins on aviation services contracts due to competitive pressures and (v) the loss of the wheelchair and escort program contracts noted above. Partially offsetting these decreases were lower workers’ compensation and vehicle related costs.

The Company has an insurance policy covering workers’ compensation claims in States in which the Company performs services. Estimated accrued liabilities are based on the Company’s historical loss experience and the ratio of claims paid to the Company’s historical payout profiles. Charges for estimated workers’ compensation related losses incurred and included in cost of sales were $2,881,041, $3,257,608 and $3,630,004, for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

$5,000 on the aviation related policy except $25,000 for damage to aircraft and $100,000 for skycap and electric cart operations. Estimated accrued liabilities are based on specific reserves in connection with existing claims as determined by third party risk management consultants and actuarial factors and the timing of reported claims. These are all factored into estimated losses incurred but not yet reported to the Company.

General and Administrative Expenses

General and administrative expenses decreased by $336,746 to $10,254,032 (12.0% of revenues) for the fiscal year ended March 31, 2006 from $10,590,778 (13.3% of revenues) in fiscal year 2005. The decrease was primarily due to lower: (i) payroll and related costs; (ii) legal fees due mainly to absence of the prior year payment by the Company of certain legal fees and expenses primarily in connection with litigation relating to the conversion of the Company’s preferred stock into common stock by certain shareholders; (iii) administrative automobile insurance costs; (iv) facility and communication costs; (v) bank fees and service charges; and (vi) depreciation charges on administrative furniture and fixtures. Partially offsetting the decrease were: (i) approximately $560,000 of professional fees related primarily to the Company entering into a consulting agreement with Giuliani Security & Safety LLC and (ii) an increase of $290,950 in non-cash charges for stock based compensation costs.

General and administrative expenses decreased by $217,606 to $10,590,778 (13.3% of revenues) for the fiscal year ended March 31, 2005 from $10,808,384 (14.2% of revenues) in fiscal year 2004. The decrease was primarily due to lower payroll and related costs. Included in general and administrative expenses are: (i) approximately $685,000 of costs incurred by the Company in connection with (a) the change in the Company’s management and Board of Directors in August 2004, and related legal fees and (b) the payment by the Company of certain legal fees and expenses primarily in connection with litigation relating to the conversion of the Company’s preferred stock into common stock by certain shareholders; and (ii) a non-cash charge for stock based compensation cost in the amount of $106,400.

Provision for Doubtful Accounts

The provision for doubtful accounts increased by $884,968 to $1,162,173 for the fiscal year ended March 31, 2006 compared with $277,205 in fiscal year 2005. The increase was due mainly to an additional provision for bad debts of $850,000 in September 2005 related to the filing by Delta Air Lines and Northwest Airlines of voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

The provision for doubtful accounts increased by $122,804 to $277,205 for the fiscal year ended March 31, 2005 compared with $154,401 in fiscal year 2004. The increase was primarily due to a $150,000 charge in October 2004 associated with the filing by ATA Airlines for protection under Chapter 11 of the U.S. Bankruptcy Code and the effect of benefits recorded in the prior year period associated with estimated recoveries on bankrupt customers’ receivables.

Bad Debt Recoveries

Bad debt recoveries decreased for the fiscal year ended March 31, 2006 by $51,983 to $3,991 from $55,974 in fiscal year 2005 as a result of higher recoveries in the previous fiscal year.

Bad debt recoveries decreased for the fiscal year ended March 31, 2005 by $142,573 to $55,974 from $198,547 in fiscal year 2004 due mainly to recoveries in fiscal year 2004 associated with airlines that filed for protection under the bankruptcy laws in fiscal year 2003.

Interest Income

Interest income for the fiscal year ended March 31, 2006 principally represents interest earned on: (i) cash balances; (ii) trust funds for potential future workers’ compensation claims and (iii) financing income from the Company’s service agreement customers. Interest income in fiscal year 2006 increased by $142,156 to $238,887 from $96,731 in fiscal year 2005.

Interest income for the fiscal year ended March 31, 2005 principally represents interest earned on trust funds for potential future workers’ compensation claims and financing income from the Company’s service agreement customers. Interest income in fiscal year 2005 increased by $6,931 to $96,731 from $89,800 in fiscal year 2004.

Interest Expense

Interest expense for the fiscal year ended March 31, 2006 decreased by $27,946 to $432,159 from $460,105 in fiscal year 2005. The decrease principally represents lower average outstanding borrowings under the Company’s commercial revolving loan agreement, partially offset by an increase in the weighted average interest rate.

Interest expense for the fiscal year ended March 31, 2005 decreased by $56,658 to $460,105 from $516,763 in fiscal year 2004. The decrease principally represents lower average outstanding borrowings under the Company’s commercial revolving loan agreement, partially offset by an increase in the weighted average interest rate.

Equipment Dispositions

Equipment dispositions are a result of the sale of vehicles, office equipment and security equipment at prices above or below book value.

The $19,137 gain on equipment dispositions for the fiscal year ended March 31, 2006 was primarily due to the disposition of Company vehicles at amounts in excess of their respective book values.

The $4,848 loss on equipment dispositions for the fiscal year ended March 31, 2005 was due mainly to the sale of a Company vehicle to its former Chief Financial Officer as provided for in his Employment Agreement with the Company.

Income Tax Benefit (Expense)

Income tax benefit for the fiscal year ended March 31, 2006 decreased $201,055 to $66,395 from $267,450 in fiscal year 2005 due mainly to a reduction in the Company’s pre-tax loss. The Company has determined based on its expectations for the future that it is more likely than not that future taxable income will be sufficient to utilize fully the net deferred tax assets at March 31, 2006 and 2005.

Income tax expense decreased from $91,543 in fiscal year 2004 to an income tax benefit of $267,450 in fiscal year 2005 due to a reduction in the valuation allowance attributable primarily to net operating loss benefits.

Liquidity and Capital Resources

The Company pays employees and administrative service clients on a weekly basis, while customers pay for services generally within 60 days after billing by the Company. In order to fund our payroll and operations, the Company maintains a commercial revolving loan arrangement, currently with CIT Group/Business Credit, Inc. (“CIT”).

We believe that existing funds, cash generated from operations, and existing sources of and access to financing are adequate to satisfy our working capital, capital expenditure and debt service requirements for the foreseeable future. However, we cannot assure you that this will be the case, and we may be required to obtain additional financing to maintain and expand our existing operations through the sale of our securities, an increase in our credit facilities or otherwise. We cannot assure you that such financing will be available upon commercially acceptable terms or otherwise. The failure by us to obtain such financing, if needed, would have a material adverse effect upon our business, financial condition and results of operations.

CIT Revolving Loan

Until March 21, 2006, we were parties to a financing agreement (the “Agreement”) with CIT that had a term of 3 years ending December 12, 2006 and provided for borrowings in an amount up to 85% of the Company’s eligible accounts receivable, but in no event more than $15,000,000. The Agreement also provided for advances against unbilled revenue (primarily monthly invoiced accounts) although this benefit is offset by a reserve against all outstanding payroll checks. The revolving loan bears interest at the prime rate, as defined, plus 1.25% per annum on the greater of: (i) $5,000,000 or (ii) the average of the net balances owed by the Company to CIT in the loan account at the close of each day during such month. Costs to close the loan totaled $279,963 and are being amortized over the three year life of the Agreement.

On March 22, 2006, the Company entered into an Amended and Restated Financing Agreement with CIT (the “Amended Agreement”), which provides for borrowings as noted above, but in no event more that $12,000,000. The Amended Agreement provides for a letter of credit sub-line in an aggregate amount of up to $1,500,000. Letters of credit are subject to a two percent (2%) per annum fee on the face amount of each letter of credit. The Amended Agreement provides that interest will be calculated on the outstanding principal balance of the revolving loans at the prime rate, as defined, plus .25% if EBITDA, as defined, is equal to or less than $500,000 for the most recently completed fiscal quarter; otherwise, at the prime rate, as defined. For LIBOR loans interest will be calculated on the outstanding principal balance of the LIBOR loans at the LIBOR rate, as defined, plus 2.75% if EBITDA, as defined, is equal to or less than $500,000 for the most recently completed fiscal quarter; otherwise, at the LIBOR rate, as defined, plus 2.50%. As of March 31, 2006, the interest rate was 7.75% per annum.

At March 31, 2006, the Company had borrowed $3,370,379 representing approximately 42% of its maximum borrowing capacity based on the definition of “eligible accounts receivable” under the terms of the Amended Agreement. However, up to $8,629,621 could additionally be available to borrow under the Amended Agreement to finance growth and increased receivables, if any.

The Company relies on its revolving loan from CIT which contains a fixed charge covenant and various other financial and non-financial covenants. If the Company breaches a covenant, CIT has the right to call the line unless CIT waives the breach. Under such circumstances, the Company’s business would be materially adversely affected if we were not able to obtain suitable alternative financing. For the fiscal year ended March 31, 2006, the Company was in compliance with all covenants under the Amended Agreement.

Cash Flows

The following table summarizes our cash flow activity for the fiscal years ended March 31, 2006, 2005 and 2004:


	2006			2005			2004

Net cash (used in) provided by operating activities	$	(4,941,428	)	$	8,149,004		$	2,169,247
Net cash (used in) provided by investing activities		(179,988	)		36,637			31,320
Net cash provided by (used in) financing activities		2,642,609			(5,684,892	)		(2,190,266	)

Investing

The Company finances vehicle purchases typically over three years and insurance through short-term borrowings. The Company has no present material commitments for capital expenditures.

Financing

During the fiscal year ended March 31, 2006, the Company issued 2,358,092 shares of common stock upon the exercise of warrants to purchase common stock at exercise prices ranging from $.75 to $1.25 per share. The proceeds from such exercises of $2,917,615 were included in common stock and additional paid-in capital at March 31, 2006.

Working Capital

Working capital increased by $3,158,674 to $6,837,745 as of March 31, 2006, from $3,679,071 as of March 31, 2005 primarily due to the exercise of warrants to purchase common stock.

The Company experienced checks issued in advance of deposits (defined as checks drawn in advance of future deposits) of $1,828,802 as of March 31, 2006, compared with $495,249 at March 31, 2005. Cash balances and book overdrafts can fluctuate materially from day to day depending on such factors as collections, timing of billing and payroll dates, and are covered via advances from the revolving loan as checks are presented for payment.

On September 14, 2005, Delta Air Lines (“Delta”) and Northwest Airlines (“Northwest”) filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company’s credit exposure, as of the date of Delta’s and Northwest’s filings aggregated approximately $1,100,000. As a result, the Company recorded an additional provision for bad debts of $850,000 in September 2005 related to such filings. The Company is currently providing services to these airlines in the normal course of business through our Aviation services division and expects to continue as a preferred service provider with Delta and Northwest. We are currently exploring opportunities to provide additional services with both airlines in the future.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our financial position or results of operations.

Contractual Obligations

The impact that our contractual obligations as of March 31, 2006 are expected to have on our liquidity and cash flow in future periods is as follows:


			Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years

Long-term debt obligations	$	80,571	$	52,614	$	27,957	$	—	$	—
Capital lease obligations		67,360		38,680		28,680		—		—
Operating lease obligations		2,388,184		823,901		1,193,408		370,875		—
Purchase obligations(1)		423,266		91,322		182,644		149,300		—
Total	$	2,959,381	$	1,006,517	$	1,432,689	$	520,175	$	—

——————

(1)

Purchase obligations include an agreement to purchase uniform cleaning services that is legally binding on the Company and that specifies all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.

Outlook

This section, Management’s Discussion and Analysis of Results of Operations and Financial Condition, contains a number of forward-looking statements, all of which are based upon current expectations. Actual results may differ materially and are qualified by the section below entitled “Forward Looking Statements.”

Financial Results

Future revenue will be largely dependent upon the Company’s ability to gain additional revenues in the security and aviation services divisions at acceptable margins while minimizing terminations of existing clients. The revenues of the security services division have stabilized over recent months after a reduction over the past few years as contracts with unacceptable margins were cancelled. Our current focus is on increasing revenues while branch managers work to sell new business and retain profitable contracts. The airline industry continues to increase its demand for services provided by the Company. On April 3, 2006, the Company announced the expansion of its aviation services division to Oakland International Airport via an award of a new service contract which commenced on May 1, 2006.

Gross profit margins increased during the fiscal year ended March 31, 2006 to 13.4% of revenues compared with an average gross profit margin of 13.2% for the fiscal year ended March 31, 2005 primarily due to: (i) expanded services with new and existing customers as noted above and (ii) lower workers’ compensation and automotive insurance costs. Partially offsetting these increases were increased labor and related costs associated with the Company’s security services division. Management expects gross profit to remain under pressure due primarily to continued price competition. However, management expects these effects to be moderated by continued

operational efficiencies resulting from better management of the Company’s cost structures and workers’ compensation experience ratings.

A cost reduction program was instituted in October 2004 which is expected to reduce the Company’s general and administrative expenses in future periods. Additional cost reduction opportunities are being pursued as they are determined.

The aviation services division represents approximately 65% of the Company’s total revenues and Delta, at annual billings of approximately $14,300,000, is the largest customer of the aviation division at approximately 26% of the aviation services division and 17% of the Company’s total revenues. Due to the existing limitations under the Amended Agreement with CIT, the Company is limited to borrowing against Delta’s accounts receivable of up to (but not exceeding) $750,000, so long as such accounts do not remain unpaid for more than thirty (30) days from the invoice date. In the event of a bankruptcy by another airline customer(s), the Company’s earnings and liquidity could be adversely affected to the extent of the accounts receivable with such airline(s), as well as from lost future revenues if such airline(s) cease operations or reduce their requirements from the Company.

As of the close of business on June 20, 2006, the Company’s cash availability was approximately $4,000,000, which is believed to be sufficient to meet its needs for the foreseeable future barring any increase in reserves imposed by CIT.

Forward Looking Statements

Certain of the statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Form 10-K and in particular those under the heading “Outlook,” contain forward-looking statements. These are based on current expectations, estimates, forecasts and projections about the industry in which the Company operates, management’s beliefs, and assumptions made by management. In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the Company. While management believes these statements are accurate, the Company’s business is dependent upon general economic conditions and various conditions specific to the industries in which the Company operates. Future trends and these factors could cause actual results to differ materially from the forward-looking statements that have been made. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, the actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

As provided for under the Private Securities Litigation Reform Act of 1995, the Company wishes to caution shareholders and investors that the following important factors, among others, could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements in this report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

During the fiscal year ended March 31, 2006, the Company did not hold a portfolio of securities instruments for either trading or for other purposes.

The Company is exposed to market risk in connection with changes in interest rates, primarily in connection with outstanding balances under its revolving line of credit with CIT. Based on the Company’s average outstanding balances during the fiscal year ended March 31, 2006, a 1% change in the prime lending rate would impact the Company’s financial position and results of operations by approximately $50,000 over the next fiscal year.

Item 8. Financial Statements and Supplementary Data.

The information required by this item is incorporated herein by reference to the financial statements and schedule listed in Item 15 (a)(1) and (a)(2) of Part IV of this Form 10-K Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

The Company maintains “disclosure controls and procedures”, as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chairman of the Board and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chairman of the Board and our Chief Financial Officer have concluded that such controls and procedures are effective at the reasonable assurance level.

An evaluation was performed under the supervision and with the participation of management, including the Company’s Chairman of the Board and its Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation and subject to the foregoing, the Chairman of the Board and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2006. There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of fiscal 2006 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required by this Item 10 will be set forth in our Proxy Statement for our 2006 Annual Meeting of Stockholders (the “2006 Proxy Statement”) under the caption “Directors and Executive Officers of the Registrant,” and is incorporated herein by reference.

Item 11. Executive Compensation.

The information required by this Item 11 will be set forth in the 2006 Proxy Statement under the caption “Executive Compensation,” and is incorporated herein by reference.

The information required by this Item 11 will be set forth in the 2006 Proxy Statement under the caption “Director Compensation and Stock Ownership Guidelines,” and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item 12 will be set forth in the 2006 Proxy Statement under the caption “Common Stock Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.

The information required by this Item 12 will be set forth in the 2006 Proxy Statement under the caption “Executive Compensation – Equity Compensation Plan Information,” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

The information required by this Item 13 will be set forth in the 2006 Proxy Statement under the caption “Certain Relationships and Related Transactions,” and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by this Item 14 will be set forth in the 2006 Proxy Statement under the caption “Principal Accountant Fees and Services,” and is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules.


(a)
			Page Number From This Form 10-K

	(1)	Financial Statements:
		Independent auditor’s report	F-1
		Balance Sheets – March 31, 2006 and 2005	F-2
		Statements of Operations – years ended March 31, 2006, 2005 and 2004	F-3
		Statements of changes in stockholders’ equity – years ended March 31, 2006, 2005 and 2004	F-4
		Statements of cash flows – years ended March 31, 2006, 2005 and 2004	F-5 – F-6
		Notes to Financial Statements	F-7 – F-19

	(2)	Financial Statement Schedules:
		Schedule II – Valuation and Qualifying Accounts	F-20
		Schedules not listed above have been omitted as either not applicable, immaterial or disclosed in the Financial Statements or notes thereto.

	(3)	Exhibits:
		A list of exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously filed or furnished by the Company) is provided in the Exhibit Index on pages 23-24 of this report.

SIGNATURES

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


		COMMAND SECURITY CORPORATION

Date: June 28, 2006	By:	/s/ Barry I. Regenstein
		Barry I. Regenstein President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities an on the dates indicated:


Signature	Title	Date

/s/ Bruce Galloway	Chairman of the Board	June 28, 2006
Bruce Galloway

/s/ Barry I. Regenstein	Chief Financial Officer	June 28, 2006
Barry I. Regenstein

/s/ Martin C. Blake, Jr.	Director	June 28, 2006
Martin C. Blake, Jr.

/s/ Robert S. Ellin	Director	June 28, 2006
Robert S. Ellin

/s/ Peter Kikis	Director	June 28, 2006
Peter Kikis

/s/ Thomas Kikis	Director	June 28, 2006
Thomas Kikis

/s/ Martin Wade, III	Director	June 28, 2006
Martin Wade, III

COMMAND SECURITY CORPORATION

EXHIBIT INDEX


Exhibit Number	Exhibit Description

3.1	Amended & Restated Articles	Incorporated by reference to Exhibit of Incorporation 3.3 of the form 10-K for the fiscal year ended March 31, 1993 (the “1993 10-K”).
3.2	By-Laws	Incorporated by reference to Exhibit 3.3 of the Form 10-K for the fiscal year ended March 31, 1991 (the “1991 10-K”).
3.3	Amendments to By-Laws	Incorporated by reference to Exhibit 3.3 of the Form 10-K/A for the fiscal year ended March 31, 1994 (the “1994 10-K/A”).
3.4	Certificate of Amendment of Certificate of Incorporation	Incorporated by reference to Exhibit 3.4 of the Eighth Amendment to the Registration Statement filed on Form S-1, File No. 33-75336 (the “S-1”).
4.1	Specimen Stock Certificate	Incorporated by reference to Exhibit 4.A to Amendment #1 to Registrant’s Registration Statement on Form S-18, file number 33, 35007-NY (the “S-18”).
4.2	Specimen Series A Preferred Stock Certificate	Incorporated by reference to Exhibit 4.2 of the Third Amendment to the S-1.
10.1	Purchase and Sale Agreement dated February 24, 1996, for the acquisition of United Security Group Inc.	Incorporated by reference to Exhibit 2.1 of the Form 8-K filed March 23, 1996.
10.2	CIT Group/Business Credit, Inc. Financing Agreement dated December 12, 2003	Incorporated by reference to Exhibit 10.41 of the Form 10-K for the fiscal year ended March 31, 2004 filed on July 14, 2004.
10.3	Amended and Restated Financing Agreement with CIT Group/Business Credit, Inc. dated March 21, 2006	Incorporated by reference to Exhibit 10.4 of the Form 8-K filed March 21, 2006.
10.4	Consulting Agreement with Giuliani Security & Safety LLC dated January 9, 2006	Incorporated by reference to Exhibit 10.3 of the Form 8-K filed January 9, 2006.
10.5	Consulting Agreement with Jericho State Capital Consulting LLC dated February 3, 2006	Incorporated by reference to Exhibit 10.4 of the Form 8-K filed February 3, 2006.
11	Computation of Loss Per Share of Common Stock	Incorporated by reference to Note 11 of the Financial Statements.
14	Command Code of Ethics	Incorporated by reference to Exhibit 14 of the Form 10-K for the fiscal year ended March 31, 2004 filed on July 14, 2004.
31.1	Certifications Pursuant to Rule 13(a)-14(a)/ 15(d)-14(a)	Exhibit 31.1 attached hereto.
31.2	Certifications Pursuant to Rule 13(a)-14(a)/ 15(d)-14(a)	Exhibit 31.2 attached hereto.
32.1	Section 1350 Certifications	Exhibit 32.1 attached hereto.
32.2	Section 1350 Certifications	Exhibit 32.2 attached hereto.


Exhibit Number	Exhibit Description

99.1	Reliance Warrant	Incorporated by reference to Exhibit 99.14 of the Form 8-K filed September 27, 2000.
99.2	Registration Rights Agreement	Incorporated by reference to Exhibit 99.22 of the Form 8-K filed September 27, 2000.
99.3	Audit Committee of the Board of Directors Charter and Powers	Incorporated by reference to Exhibit 99.23 of the Form 10-K for the fiscal year ended March 31, 2001 filed on July 3, 2001
99.4	2000 Stock Option Plan	Incorporated by reference to Exhibit 99.25 of the Form 10-K for the fiscal year ended March 31, 2001 filed on July 3, 2001.
99.5	2005 Stock Incentive Plan	Exhibit 99.5 attached hereto.
99.5	Blake Warrant	Incorporated by reference to Exhibit 99.27 of the Form 10-K for the fiscal year ended March 31, 2001 filed on July 3, 2001.
99.6	Gordon Robinett Employment Agreement	Incorporated by reference to Exhibit 99.31 of the Form 10-K for the fiscal year ended March 31, 2004 filed on July 14, 2004.

INDEPENDENT AUDITOR’S REPORT ON THE FINANCIAL STATEMENTS

To the Board of Directors and Stockholders
of Command Security Corporation

We have audited the accompanying balance sheets of Command Security Corporation as of March 31, 2006 and 2005, and the related statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2006. Our audits also included the financial statement schedule II – Valuation and Qualifying Accounts. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule 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 financial statements referred to above present fairly, in all material respects, the financial position of Command Security Corporation as of March 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three fiscal years ended March 31, 2006, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1, the accompanying financial statements for the fiscal year ended March 31, 2005 have been restated.

/s/ D’ARCANGELO & CO., LLP

June 20, 2006

Poughkeepsie, New York

F-1

COMMAND SECURITY CORPORATION

BALANCE SHEETS

March 31, 2006 and 2005


	2006			2005

ASSETS
Current assets:
Cash and cash equivalents	$	32,243		$	2,511,050
Accounts receivable from guard service customers, less allowance for doubtful accounts of $252,689 and $275,223, respectively		13,103,581			11,006,310
Accounts receivable from administrative service client customers, less allowance for doubtful accounts of $80,203 and $26,242, respectively		700,519			623,529
Prepaid expenses		721,451			788,045
Other assets		2,291,135			347,592
Total current assets		16,848,929			15,276,526
Furniture and equipment at cost, net		405,179			427,673
Intangible assets, net		79,450			174,896
Restricted cash		74,447			72,010
Other assets		705,294			560,255
Total assets	$	18,113,299		$	16,511,360

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Checks issued in advance of deposits	$	1,828,802		$	495,249
Current maturities of long-term debt		52,614			26,699
Current maturities of obligations under capital leases		38,680			27,475
Short-term borrowings		3,383,740			4,811,774
Accounts payable		939,526			399,374
Due to service companies		101,391			160,115
Accrued expenses and other liabilities		3,666,431			5,676,769
Total current liabilities		10,011,184			11,597,455
Insurance reserves		420,781			423,449
Long-term debt, due after one year		27,957			41,066
Obligations under capital leases, due after one year		28,680			40,063
Total liabilities		10,488,602			12,102,033
Commitments and contingencies (Notes 16, 17 and 18)
Stockholders’ equity:
Preferred stock, convertible Series A, $.0001 par value per share, 1,000,000 shares authorized		—			—
Common stock, $.0001 par value per share, 20,000,000 shares authorized, 10,137,970 and 7,779,878 shares issued and outstanding, respectively		1,014			778
Additional paid-in capital		13,663,311			10,348,582
Accumulated deficit		(6,039,628	)		(5,940,033	)
Total stockholders’ equity		7,624,697			4,409,327
Total liabilities and stockholders’ equity	$	18,113,299		$	16,511,360

See accompanying notes and auditor’s report

F-2

COMMAND SECURITY CORPORATION

STATEMENTS OF OPERATIONS

Years Ended March 31, 2006, 2005 and 2004


	2006			2005			2004

Revenues		$85,208,615			$79,654,744		$	75,904,782
Cost of revenues		73,788,256			69,132,218			64,945,113
Gross profit		11,420,359			10,522,526			10,959,669
Operating expenses
General and administrative expenses		10,254,032			10,590,778			10,808,384
Provision for doubtful accounts and notes		1,162,173			277,205			154,401
Bad debt recoveries		(3,991	)		(55,974	)		(198,547	)
		11,412,214			10,812,009			10,764,238
Operating income (loss)		8,145			(289,483	)		195,431
Other income (expenses)
Interest income		238,887			96,731			89,800
Interest expense		(432,159	)		(460,105	)		(516,763	)
Gain (loss) on equipment dispositions		19,137			(4,848	)		12,667
		(174,135	)		(368,222	)		(414,296	)

Loss before income tax benefit (expense)		(165,990	)		(657,705	)		(218,865	)
Income tax benefit (expense)		66,395			267,450			(91,543	)
Net loss		(99,595	)		(390,255	)		(310,408	)
Preferred stock dividends		—			(38,413	)		(162,695	)
Net loss applicable to common stockholders	$	(99,595	)	$	(428,668	)	$	(473,103	)
Loss per share of common stock
Basic	$	(.01	)	$	(.06)		$	(.08	)
Diluted	$	(.01	)	$	n/a		$	(.08	)
Weighted average number of common shares outstanding
Basic		8,834,952			7,302,738			6,287,343
Diluted		9,646,915			7,862,786			6,390,525

See accompanying notes and auditor’s report

F-3

COMMAND SECURITY CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended March 31, 2006, 2005 and 2004


	Preferred Stock			Common Stock		Paid-In Capital			Accumulated Deficit			Total

Balance at March 31, 2003	$	2,033,682		$	629	$	8,171,870		$	(5,239,370	)	$	4,966,811
Preferred stock dividends							(162,695	)					(162,695	)
Net loss										(310,408	)		(310,408	)

Balance at March 31, 2004		2,033,682			629		8,009,175			(5,549,778	)		4,493,708
Preferred stock dividends							(38,413	)					(38,413	)
Preferred stock conversion		(2,033,682	)		123		2,033,559						—
Warrants exercised					26		237,861						237,887
Stock compensation cost							106,400						106,400
Net loss										(390,255	)		(390,255	)

Balance at March 31, 2005		—			778		10,348,582			(5,940,033	)		4,409,327
Warrants exercised					236		2,917,379						2,917,615
Stock compensation cost							397,350						397,350
Net loss										(99,595	)		(99,595	)

Balance at March 31, 2006	$	—		$	1,014	$	13,663,311		$	(6,039,628	)	$	7,624,697

See accompanying notes and auditor’s report

F-4

COMMAND SECURITY CORPORATION

STATEMENTS OF CASH FLOWS

Years Ended March 31, 2006, 2005 and 2004

Increase (Decrease) in Cash and Cash Equivalents


	2006			2005			2004

OPERATING ACTIVITIES
Net loss	$	(99,595	)	$	(390,255	)	$	(310,408	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		296,797			396,471			477,314
Stock based compensation costs		397,350			106,400			—
Provision for doubtful accounts and notes receivable, net of recoveries		1,158,182			221,231			(44,146	)
(Gain) loss on equipment dispositions		(19,137	)		4,848			(12,667	)
Deferred income taxes		(66,395	)		(267,450	)		—
Insurance reserves		(10,279	)		(21,805	)		(7,182	)
Changes in operating assets and liabilities:
Accounts receivable		(3,332,443	)		6,192,186			(471,715	)
Prepaid expenses		173,489			1,073,142			794,950
Other receivables		(1,827,741	)		(49,434	)		(843,583	)
Other assets		(90,357	)		1,287,716			209,234
Accounts payable and other current liabilities		(1,462,575	)		(315,956	)		2,317,340
Due to administrative service clients		(58,724	)		(88,090	)		60,110
Net cash (used in) provided by operating activities		(4,941,428	)		8,149,004			2,169,247

INVESTING ACTIVITIES
Purchases of equipment		(74,780	)		(55,113	)		(47,078	)
Proceeds from equipment dispositions		10,595			20,850			20,164
Issuance of note to administrative service client		(125,000	)		—			—
Principal collections on notes receivable		9,197			70,900			58,234
Net cash (used in) provided by investing activities		(179,988	)		36,637			31,320

FINANCING ACTIVITIES
Net repayments on line-of-credit		(1,151,976	)		(4,275,669	)		(7,814	)
Increase (decrease) in checks issued in advance of deposits		1,333,553			(71,362	)		(514,457	)
Debt issuance costs		—			—			(277,988	)
Proceeds from warrant exercises		2,917,615			237,887			—
Principal payments on other borrowings		(419,855	)		(1,430,391	)		(1,113,560	)
Principal payments on capital lease obligations		(36,728	)		(66,270	)		(73,076	)
Payment of preferred stock dividends		—			(79,087	)		(203,371	)
Net cash provided by (used in) financing activities		2,642,609			(5,684,892	)		(2,190,266	)
Net change in cash and cash equivalents		(2,478,807	)		2,500,749			10,301
Cash and cash equivalents, beginning of year		2,511,050			10,301			—
Cash and cash equivalents, end of year	$	32,243		$	2,511,050		$	10,301

See accompanying notes and auditor’s report

F-5

COMMAND SECURITY CORPORATION

STATEMENTS OF CASH FLOWS – (continued)

Years Ended March 31, 2006, 2005 and 2004

1. Supplemental Disclosures of Cash Flows Information

Cash paid during the years for:


	2006		2005		2004

Interest	$	440,696	$	470,595	$	516,763
Income Taxes		22,634		45,328		229,063

2. Supplemental Disclosures of Non-Cash Investing and Financing Activities

During the year ended March 31, 2004, the line of credit with LaSalle Business Credit, Inc. (“LaSalle”) was terminated and replaced with a line of credit from CIT Group/Business Credit, Inc. (“CIT”). The proceeds from CIT to LaSalle in the amount of $8,723,102 have been excluded from net repayments on the line of credit, on the statements of cash flows presented.

During the year ended March 31, 2004, the Company reclassified $1,930,379 from accounts receivable in connection with the FAA disputed billings. This amount has been excluded from the statements of cash flows presented.

During the year ended March 31, 2003, the Company accrued $600,000 in other payables in reference to a dispute with the Office of General Services (“OGS”). During the year ended March 31, 2004, the Company agreed to a settlement with the OGS in the same amount. A portion of the agreement calls for 21 monthly payments totaling $527,000, commencing December 1, 2003. This amount has been excluded from the change in other payables and proceeds from long-term debt financing on the statements of cash flows presented.

For the fiscal years ended March 31, 2006, 2005 and 2004, the Company purchased transportation equipment with direct installment and lease financing of $86,259, $47,270 and $162,417, respectively. These amounts have been excluded from the purchases of equipment and proceeds from long-term debt on the statements of cash flows presented.

The Company may obtain short-term financing to meet its insurance needs. For the fiscal years ended March 31, 2006, 2005 and 2004, $106,895, $924,733 and $910,104, respectively, were borrowed for this purpose. These borrowings have been excluded from the statements of cash flows presented.

During the year ended March 31, 2005, the holder of 12,325.35 shares of the Company’s Series A convertible preferred stock converted such shares into 1,232,535 shares of common stock. The debit to preferred stock of $2,033,682 and credits to common stock of $123 and additional paid-in capital of $2,033,559 have been excluded from the statements of cash flows presented.

As of March 31, 2004, the Company accrued dividends of $40,674 on its Series A convertible preferred stock. This charge to additional paid-in capital and credit to dividends payable has been excluded from the statements of cash flows presented.

See accompanying notes and auditor’s report

F-6

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

1. Business Description and Summary of Accounting Policies

The following is a description of the principal business activities and significant accounting policies employed by Command Security Corporation.

Principal business activities

Command Security Corporation (the “Company”) is a uniformed security officer service company operating in Connecticut, California, Delaware, Florida, Illinois, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon and Pennsylvania. In addition, the Company also provides other security officer companies (administrative service clients) and police departments in various states with administrative services, such as billing, collection and payroll, for a percentage of the related gross revenue.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the years reported. Estimates are used when accounting for certain items such as allowances for doubtful accounts, depreciation and amortization, income tax assets and insurance reserves. Estimates are based on historical experience, where applicable or other assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from those estimates under different assumptions or conditions.

Revenue recognition

The Company records revenues as services are provided to its customers. Revenues consist primarily of security officer services which are typically billed at hourly rates. These rates may vary depending on base, overtime and holiday time worked. Revenues for administrative services provided to other security officer companies are calculated as a percentage of the administrative service client’s revenues and are recognized when billings for the related security officer services are generated.

Cash and cash equivalents

The Company defines cash and cash equivalents as operating cash (non-restricted) and highly liquid investments with maturities of ninety (90) days or less. The carrying amounts of our cash equivalents approximate their fair values.

Furniture and equipment

Furniture and equipment are stated at cost. Depreciation is generally recorded using the straight-line method over estimated useful lives of the equipment ranging from three to seven years.

Intangible assets

Intangible assets are stated at cost and consist primarily of customer lists and borrowing costs which are being amortized on a straight-line basis over three to five years. The life assigned to customer lists acquired is based on management’s estimate of the attrition rate. The attrition rate is estimated based on historical contract longevity and management’s operating experience. We test for impairment annually or when events and circumstances warrant such a review. Any potential impairment is evaluated based on anticipated undiscounted future cash flows and actual customer attrition in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144.

F-7

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

1. Business Description and Summary of Accounting Policies – continued

Advertising costs

The Company expenses advertising costs as incurred. Amounts incurred for recruitment and general business advertising were $62,750, $37,375 and $33,159 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

Trade receivables

Insurance reserves

Income taxes

Income (loss) per common share

Under the requirements of SFAS No. 128, “Earnings Per Share,” the dilutive effect of potential common shares, if any, is excluded from the calculation for basic earnings per share. Diluted earnings per share are presented for the fiscal years ended March 31, 2006 and 2004 because of the effect the assumed issuance of common shares would have if the outstanding stock options and warrants were exercised.

Accounting for stock options

In December 2002 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, (“SFAS 148”), “Accounting for Stock-Based Compensation – Transition and Disclosure”, an amendment of SFAS No. 123, (“SFAS 123”), “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. Since SFAS 148 was adopted during fiscal year ended March 31, 2003, the Company could elect to adopt any of the three transitional recognition provisions. The Company has chosen to adopt the prospective method of accounting for stock-based compensation. The adoption of SFAS 148 resulted in a non-cash charge of $19,600 for stock compensation cost for the three months ended June 30, 2005.

F-8

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

1. Business Description and Summary of Accounting Policies – continued

Fair value

The fair value of the Company’s long-term debt is based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. At March 31, 2006 and 2005, the fair value of long-term debt approximates its carrying amount.

Reclassifications

Certain amounts have been reclassified to conform to the fiscal 2006 presentation. Administrative service revenues of $350,635, $329,984 and $336,010 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively, have been included with total revenue. Amortization of intangibles of $104,722, $95,321 and $83,093 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively, have been included within general and administrative expenses. These reclassifications had no effect on the Company’s financial position or results of operations.

Restatement of prior period financial statements

In preparing the fiscal 2006 financial statements, the Company determined that Accounts receivable and Accrued expenses and other liabilities at March 31, 2005 were overstated by $1,446,118 because of an incorrect reclassification of accounts receivable credit balances associated with customer prepayments. As a result, the Company has restated the accompanying fiscal 2005 financial statements to correct for the overstatement noted above. The correction had no effect on the Company’s financial position or results of operations.

2. Accounts Receivable Disputed

Accounts receivable disputed in the amount of $1,965,006 net of a $965,373 billing adjustment for the fiscal years ended March 31, 2004 represents the balance reported by the Company, as due from the FAA in connection with pre-board screening services rendered under a contract completed during November 2002. On June 14, 2004, the Company collected $1,965,000 from the Defense Contract Management Agency in complete settlement of this dispute.

3. Furniture and Equipment

Furniture and equipment at March 31, 2006 and 2005 consist of the following:


	2006			2005

Transportation equipment	$	682,088		$	741,113
Security equipment		512,337			479,668
Office furniture and equipment		1,274,916			1,239,980
		2,469,341			2,460,761
Accumulated depreciation		(2,064,162	)		(2,033,088	)
Total	$	405,179		$	427,673

F-9

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

3. Furniture and Equipment – continued

Depreciation expense for the fiscal years ended March 31, 2006, 2005 and 2004, was $192,075, $301,150 and $394,221, respectively, and includes amortization of assets purchased under capital lease arrangements in the amounts of $35,751, $93,086 and $105,254 for each of the respective years then ended (see Note 17).

4. Intangible Assets

Intangible assets at March 31, 2006 and 2005 consist of the following:


	2006			2005

Customer list	$	30,000		$	30,000
Borrowing cost		289,240			279,963
Goodwill		20,402			20,402
		339,642			330,365
Accumulated amortization		(260,192	)		(155,469	)
Total	$	79,450		$	174,896

Amortization expense for the fiscal years ended March 31, 2006, 2005 and 2004, was $104,722, $95,321 and $83,093, respectively. During the year ended March 31, 2005, the Company removed fully amortized customer lists and borrowing costs with initial costs of $181,293 and $190,034, respectively, from its accounts. Amortization expense for the years ending March 31, 2007 and 2008 will be $33,741 and $25,307, respectively.

For the fiscal years ended March 31, 2006 and 2005, respectively, the balance of the intangible assets represents the value of goodwill in the amount of $20,402 which is not subject to amortization and net borrowing costs in the amount of $59,048 and $154,494, respectively, which is subject to amortization on a straight line basis over the life of the Company’s financing agreement (see Note 8).

5. Restricted Cash

Restricted cash represents deposits for the benefit of the Company’s insurance carrier as collateral for workers’ compensation claims. The Company’s insurance carrier released $36,817 from the restrictions in September 2004.

6. Other Assets

Other assets at March 31, 2006 and 2005 consist of the following:


	2006			2005

Workers’ compensation insurance	$	2,135,460		$	158,326
Note receivable		115,803			—
Other receivables		215,558			321,654
Security deposits		195,499			159,284
Deferred tax asset		333,845			267,450
Other		264			1,133
		2,996,429			907,847
Current portion		(2,291,135	)		(347,592	)
Total non-current portion	$	705,294		$	560,255

F-10

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at March 31, 2006 and 2005 consist of the following:


	2006		2005

Payroll and related expenses	$	2,408,927	$	3,242,696
Customer prepayments, net		811,256		1,724,077
Taxes and fees payable		317,097		391,682
Accrued interest payable		24,415		32,952
Other		104,736		285,362
Total	$	3,666,431	$	5,676,769

8. Short-Term Borrowings

Short-term borrowings at March 31, 2006 and 2005 consist of the following:


	2006		2005

Line of credit	$	3,370,379	$	4,522,355
Various insurance financing arrangements, interest at 6.36% for 2006 and 5.55% and 5.86% for 2005		13,361		289,419
Total	$	3,383,740	$	4,811,774

On December 12, 2003, the Company entered into a three year agreement with CIT Group/Business Credit, Inc. (“CIT”) under a financing agreement (the “Agreement”), which provides for borrowings in an amount of up to 85% of the Company’s eligible accounts receivable, as defined in the Agreement, but in no event more than $15,000,000. The Agreement also provides for advances against unbilled revenue (primarily monthly invoiced accounts) although this benefit is offset by a reserve against all outstanding payroll checks. The revolving loan bears interest at the prime rate, as defined, plus 1.25% per annum on the greater of: (i) $5,000,000 or (ii) the average of the net balances owed by the Company to CIT in the loan account at the close of each day during such month (see below). Costs to close the loan totaled $279,963 and are being amortized over its 3 year life.

At March 31, 2006, the Company had borrowed $3,370,379 representing approximately 42% of its maximum borrowing capacity based on the definition of “eligible accounts receivable” under the terms of the Amended Agreement. However, as the business grows and produces new receivables, up to $8,629,621 could additionally be available to borrow under the Amended Agreement.

F-11

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

9. Long-Term Debt

Long-term debt at March 31, 2006 and 2005 consist of the following:


	2006			2005

Various installment loans due at various dates through March 2009, with interest ranging from 4.5% to 10.25%(a)	$	80,571		$	67,765
		80,571			67,765
Current maturities		(52,614	)		(26,699	)
Total		27,957			41,066

——————

(a)

Payable to General Motors Acceptance Corporation and Ford Motor Credit Corporation. The notes are collateralized by automobiles.

The aggregate amount of required principal payments of long-term debt is as follows:


Year ending: March 31, 2007	$	52,614
March 31, 2008		22,055
March 31, 2009		5,902
Total	$	80,571

10. Preferred Stock

The Board of Directors has been authorized to issue preferred stock in series and to fix the number, designation, relative rights, preferences and limitations of each series of such preferred stock. Of the 1,000,000 shares authorized for issuance, 12,325 had been designated as Series A Convertible Preferred Stock (“Series A”). The Series A shareholders were entitled to receive annual dividends equal to 8% of the liquidation value of their shares, payable quarterly in cash. Upon liquidation or redemption the Series A shareholders were entitled to $165 per share or $2,033,682. As of June 25, 2004, the preferred stock was converted into 1,232,535 shares of the Company’s common stock.

During the year ended March 31, 2005, $79,087 in preferred dividends was paid representing the outstanding accrual for dividends payable at March 31, 2004 together with the June 2004 quarter.

11. Net Loss per Share

The following is a reconciliation of the numerators and the denominators of the basic and diluted per-share computations for net loss for the fiscal years ended March 31, 2006, 2005 and 2004:


	Loss (Numerator)			Shares (Denominator)		Per-Share Amount

Year ended March 31, 2006
Basic EPS	$	(99,595	)	$	8,834,952	$	(.01	)
Options issued November 2000, February 2001, August 2004, May 2005, September 2005 and February 2006					811,963
Diluted EPS	$	(99,595	)	$	9,646,915	$	(.01	)
Year ended March 31, 2005
Basic EPS	$	(428,668	)	$	7,302,738	$	(.06	)
Effect of dilutive shares:
Options issued November 2000, February 2001, March 2002 and August 2004					560,048
Diluted EPS	$	(428,668	)	$	7,862,786	$	n/a
Year ended March 31, 2004
Basic EPS	$	(473,103	)	$	6,287,343	$	(.08	)
Effect of dilutive shares:
Options issued November 2000, February 2001 and March 2002					103,182
Diluted EPS	$	(473,103	)	$	6,390,525	$	(.08	)

F-12

COMMAND SECURITY CORPORATN

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

11. Net Loss per Share – continued

Convertible preferred stock outstanding during the year ended March 31, 2004 and additional options and warrants outstanding during the year ended March 31, 2004 were excluded from the computation of diluted EPS because the exercise price was greater than the average market price of the common shares.

12. Retirement Plans

In November, 1999, the Company adopted a qualified retirement plan providing for elective employee deferrals and discretionary employer contributions to non-highly compensated participants. The plan does not allow for employer matching of elective deferrals. For the fiscal years ended March 31, 2006, 2005 and 2004, no discretionary amounts have been accrued or paid.

13. Concentrations of Credit Risk

Geographic concentrations of credit risk with respect to trade receivables are primarily in California with 28% and 26% and in the New York Metropolitan area with 32% and 40% of total receivables as of March 31, 2006 and 2005, respectively. The remaining trade receivables consist of a large number of customers dispersed across many different geographic regions. During the fiscal years ended March 31, 2006, 2005 and 2004, the Company generated 65%, 63% and 60%, respectively, of its revenue from aviation and related services. Trade receivables due from the commercial airline industry comprised 38% and 47% of net receivables as of March 31, 2006 and 2005, respectively. The Company’s remaining customers are not concentrated in any specific industry.

The Company maintains its cash accounts in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes they are not exposed to any significant credit risk.

14. Significant Customers

The Company operates as a provider of security officer services to a wide range of industries which the Company has categorized into three groups; security officer services, aviation services and support services. The latter includes revenues from administrative service agreements and back office support to police departments.

Net revenues for the groups noted above were as follows for the three years ended March 31:


	2006		2005		2004

Security Officer Services	$	29,269,512	$	28,858,519	$	30,047,546
Aviation Services		55,588,468		50,466,240		45,521,225
Support Services		350,635		329,985		336,011
Total	$	85,208,615	$	79,654,744	$	75,904,782

For the fiscal years ended March 31, 2006 and 2005, one airline customer accounted for approximately $14,309,000 and $12,604,000, respectively, of the Company’s total revenue. For the year ended March 31, 2004, two airline industry customers accounted for approximately $6,913,000 and $6,810,000, respectively, of the Company’s total revenue.

15. Insurance Reserves

The Company has an insurance policy covering workers’ compensation claims in states that the Company performs services. Estimated accrued liabilities are based on the Company’s historical loss experience and the ratio of claims paid to the Company’s historical payout profiles. Charges for estimated workers’ compensation related losses incurred and included in cost of sales were $2,881,041, $3,257,608 and $3,630,004, for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

F-13

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

15. Insurance Reserves – continued

The nature of the Company’s business also subjects it to claims or litigation alleging that it is liable for damages as a result of the conduct of its employees or others. The Company insures against such claims and suits through general liability policies with third-party insurance companies. Such policies have limits of $5,000,000 per occurrence. On the aviation related business, as of October 1, 2002, the Company acquired a policy with a $25,000,000 limit per occurrence. From October 17, 2003 to October 17, 2004, the Company had an excess general liability insurance policy covering aviation claims for an additional $25,000,000 in the aggregate. As of October 1, 2004, the Company acquired a policy with a $30,000,000 limit per occurrence. The Company retains the risk for the first $25,000 per occurrence on the non-aviation related policy which includes airport wheelchair operations and $5,000 on the aviation related policy except $25,000 for damage to aircraft and $100,000 for skycap and electric cart operations. Estimated accrued liabilities are based on specific reserves in connection with existing claims as determined by third party risk management consultants and actuarial factors and the timing of reported claims. These are all factored into estimated losses incurred but not yet reported to the Company.

Cumulative amounts estimated to be payable by the Company with respect to pending and potential claims for all years in which the Company is liable under its general liability retention and workers’ compensation policies have been accrued as liabilities. Such accrued liabilities are necessarily based on estimates; thus, the Company’s ultimate liability may exceed or be less than the amounts accrued. The methods of making such estimates and establishing the resultant accrued liability are reviewed continually and any adjustments resulting there from are reflected in current results of operations.

16. Contingencies

The nature of the Company’s business is such that there is a significant volume of routine claims and lawsuits that are issued against it, the vast majority of which never lead to substantial damages being awarded. The Company maintains general liability and workers’ compensation insurance coverage that it believes is appropriate to the relevant level of risk and potential liability. Some of the claims brought against the Company could result in significant payments; however, the exposure to the Company under general liability is limited to the first $25,000 per occurrence on the non-aviation and airport wheelchair operations related claims and $5,000 per occurrence on the aviation related claims except $25,000 for damage to aircraft and $100,000 for skycap and electric cart operations. Any punitive damage award would not be covered by the general liability insurance policy. The only other potential impact would be on future premiums, which may be adversely affected by an unfavorable claims history.

In addition to such cases, the Company has been named as a defendant in several uninsured employment related claims which are currently before various courts, the EEOC or various state and local agencies. The Company has instituted policies to minimize these occurrences and monitor those that do occur. At this time the Company is unable to determine the impact on the financial position and results of operations that these claims may have, should the investigations conclude that they are valid.

The Company has employment agreements with its President and its Chief Operating Officer (“COO”). The agreement with the President is for a three year period expiring September 2007. The terms of the agreement call for severance payments and specified benefits of approximately $270,000 depending upon the reason for termination. The agreement with the COO is for a three year period which has been extended to July 2006. The terms of this agreement call for severance payments and specified benefits of approximately $260,000 depending upon the reason for termination.

17. Lease Commitments

The Company is obligated under various operating lease agreements for office space, equipment and auto rentals. Rent expense under operating lease agreements approximated $962,687, $952,166 and $947,539, for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.

F-14

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

17. Lease Commitments – continued

The Company leases certain equipment and vehicles under agreements which are classified as capital leases. Most equipment leases have purchase options at the end of the original lease term. Cost and related accumulated depreciation of leased capital assets included in furniture and equipment at March 31, 2006 are $718,257 and $628,730 and at March 31, 2005 are $714,149 and $625,421, respectively.

The future minimum payments under long-term non-cancelable capital and operating lease agreements are as follows:


	Capital Leases			Operating Leases

Year ending: March 31, 2007	$	43,372		$	823,901
March 31, 2008		20,966			604,840
March 31, 2009		10,116			347,529
March 31, 2010		—			241,039
March 31, 2011		—			184,502
Later years		—			186,373
		74,454			2,388,184
Amounts representing interest		(7,094	)		—
Total	$	67,360		$	2,388,184

18. Other Commitments

On March 31, 2004, the Company settled a dispute with a uniform cleaning service which calls for the Company to pay $1,756 per week for 344 weeks or a total amount of $604,133 ending in fiscal 2011. The expense recorded in connection with weekly payments under this agreement amounted to $93,068 and $87,800 for the fiscal years ended March 31, 2006 and 2005, respectively.

The required future minimum payments under the agreement are as follows:



Year ending: March 31, 2007	$	91,322
March 31, 2008		91,322
March 31, 2009		91,322
March 31, 2010		91,322
March 31, 2011		57,978
Total	$	423,266

19. Stock Option Plan and Warrants

In November 2000, the Company’s Board of Directors and stockholders approved the adoption of a qualified stock option plan. Under the stock option plan, substantially all employees are eligible to receive options to purchase up to an aggregate of 500,000 shares at an exercise price which cannot be less than the fair market value of the shares on the date the options are granted. In February 2001, August 2004 and May 2005, options to purchase 225,000, 200,000 and 40,000 shares, respectively, of common stock were issued and in April 2002, August 2003 and April 2004, options to purchase 50,000, 20,000 and 75,000 shares, respectively, were cancelled due to terminations of employment. During fiscal 2006, the Company received proceeds of $45,000 in connection with the exercise of stock options to purchase 60,000 shares of the Company’s common stock at an exercise price of $.75 per share. The outstanding options are exercisable at any time before January 31, 2011, August 29, 2014 and May 23, 2015 at $.75, $1.35 and $1.49 per share with respect to the February 2001, August 2004 and May 2005 issuances, respectively.

F-15

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

19. Stock Option Plan and Warrants – continued

In September 2005, the Company’s Board of Directors and stockholders approved the adoption of a qualified stock incentive plan. Under the stock incentive plan, substantially all employees of and consultants to, the Company, are eligible to receive options to purchase up to an aggregate of 1,000,000 shares of the Company’s common stock at an exercise price which cannot be less than the fair market value of the shares on the date the options are granted. In September 2005, options to purchase 80,000 shares of the Company’s common stock were issued. The outstanding options are exercisable at any time before September 21, 2015 at $2.05 per share.

In February 2006, the Company granted to a consultant a warrant to purchase an aggregate of 350,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The outstanding warrant is exercisable at any time before February 4, 2009.

On May 21, 2004, GCM Securities Partners, LLC (“GCM”) purchased from Reliance Security Group, plc (“Reliance”) securities which included: (i) a warrant to purchase 150,000 shares of the Company’s common stock at an exercise price of $1.03125 per share and (ii) a warrant to acquire 2,298,092 shares of the Company’s common stock at an exercise price of $1.25 per share. In November 2004, the Company received proceeds of $154,687 in connection with the exercise of the warrant to purchase 150,000 shares of the Company’s common stock. During fiscal 2006, the Company received proceeds of $2,872,615 in connection with the warrant to purchase 2,298,092 shares of the Company’s common stock.

On August 30, 2004 (the “Effective Date”), the Company issued stock options to the Chief Operating Officer (the “Executive”) to purchase 500,000 shares of the Company’s common stock at an exercise price of $1.35 per share. The options vest, and may be exercised by the Executive with respect to 200,000 shares on the Effective Date and commencing one year after the Effective Date, 12,500 shares per month through August 2007.

In March 2002, the Company issued warrants for 10,000 shares of common stock to each of three of the Company’s directors at an exercise price of $.82 per share, the fair market value at the time of the grant. In February 2005, the Company received proceeds of $8,200 in connection with the exercise of warrants to purchase 10,000 shares of the Company’s common stock. The remaining warrants expired on February 28, 2005.

In March 2002, the Company issued warrants for 100,000 shares of common stock to individuals associated with a consulting agreement at an exercise price of $.75. During the fiscal year ended March 31, 2005, the Company received proceeds of $75,000 in connection with the exercises of warrants to purchase 100,000 shares of the Company’s common stock.

Certain of the option and warrant agreements contain anti-dilution adjustment clauses.

The following is a summary of activity related to all Company stock option and warrant arrangements:


	Options					Warrants
	Exercise Price			Number of Shares		Exercise Price			Number of Shares

Outstanding at March 31, 2003
Issued	$.75	–	$1.25	1,187,959		$.75	–	$1.25	2,782,577
Forfeited	75	–	1.25	(1,032,959	)	.75			100,000
Outstanding at March 31, 2004	.75			155,000		.75	–	1.25	2,782,577
Issued	1.35			700,000		.75	–	1.03
Exercised									(260,000	)
Forfeited	.75			(75,000	)	1.25			(204,485	)
Expired						.82			(20,000	)
Outstanding at March 31, 2005	.75	–	1.35	780,000		1.25			2,298,092
Issued	1.49	–	2.05	120,000		2.00			350,000
Exercised	.75			(60,000	)	1.25			(2,298,092	)
Outstanding at March 31, 2006	$.75	–	$2.05	840,000		$2.00			350,000

F-16

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

19. Stock Option Plan and Warrants – continued

At March 31, 2006 there were 840,000 and 350,000 options and warrants outstanding, respectively, exercisable at prices ranging from $.75 to $2.05, and 2,290,000 shares reserved for issuance under all stock arrangements.

Significant option and warrant groups outstanding at March 31, 2006 and the related weighted average exercise price and life information are as follows:


Range of Exercise Price	Options/ Warrants Outstanding	Options/ Warrants Exercisable	Weighted Average Exercise Price		Weighted Average Remaining Life (Years)

$.75–$2.05	840,000	542,500	$	1.41	3.83
2.00	350,000	350,000		2.00	2.85
$.75–$2.05	1,190,000	892,500		1.58	3.58

As discussed in Note 1, the Company adopted the provisions of SFAS 148 for the fiscal year ended March 31, 2003. Beginning April 1, 2002, the Company adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation”, prospectively to all employee awards granted, modified or settled after April 1, 2002. For the year ended March 31, 2005, the fair value of stock options granted is estimated on the date of the grant using the Black-Scholes option pricing model and amortized ratably to expense over the options’ vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

The weighted average estimated values of employee stock options granted during fiscal 2006 and 2005 were $.75 and $.38, respectively. The values of options granted in fiscal 2006 and 2005 were estimated at the date of grant using the following weighted average assumptions: dividend yield of 0.00%; stock price historical volatility factor of 42.9%; expected life of 3 years; and risk-free interest rate of 3.64%. There was no cost related to stock-based employee compensation included in the determination of net income (loss) for the year ended March 31, 2004 since there were no employee awards granted during this year.

20. Income Taxes

Income tax benefit (expense) for the fiscal years ended March 31 consists of the following:


	2006		2005		2004

Current:
Federal	$	—	$	—	$	(76,203	)
State and local		—		—		(15,340	)
		—		—		(91,543	)
Deferred:
Federal		51,545		207,875		—
State and local		14,850		59,575		—
		66,395		267,450		—
Income tax benefit (expense)	$	66,395	$	267,450	$	(91,543	)

F-17

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

20. Income Taxes – continued

The differences (expressed as a percentage of pretax income) between the statutory federal income tax rate and the effective income tax rate as reflected in the accompanying statements of operations are as follows:


	2006		2005		2004

Statutory federal income tax rate	34.0		34.0		34.0
State and local income taxes	9.0		9.8		9.8
Valuation allowance and reserves	9.3		1.8		16.7
Permanent differences	(12.3	)	(4.9	)	(18.5	)
Other	—		—		(.2	)
Effective tax rate	40.0	%	40.7	%	41.8	%

The significant components of deferred tax assets and liabilities as of March 31, 2006 and 2005 are as follows:


		2006			2005

Current deferred tax assets:
Accounts receivable	$	59,291		$	38,185
Accrued expenses		106,207			106,207
Contingency reserves		55,900			11,610
		221,398			156,002
Valuation allowance		(189,048	)		(140,216	)
Net current deferred tax asset	$	32,350		$	15,786
Non-current deferred tax assets (liabilities):
Equipment	$	(70,393	)	$	(76,614	)
Intangible assets		503,711			606,973
Self-insurance		180,937			182,083
Workers compensation reserve		459,016			195,158
Net operating loss carryover		688,654			1,042,484
Income tax credits		84,790			84,790
Employee stock compensation		216,614			45,750
		2,063,329			2,080,624
Valuation allowance		(1,761,834	)		(1,828,960	)
Net non-current deferred tax asset	$	301,495		$	251,664

The valuation allowance decreased by $18,294 and $89,270 during the fiscal years ended March 31, 2006 and 2004, respectively, and increased by $16,986 during the year ended March 31, 2005. The Company has determined based on its expectations for the future that it is more likely than not that future taxable income will be sufficient to utilize fully the net deferred tax assets at March 31, 2006 and 2005. Federal net operating loss carryforwards were approximately $1,601,521 at March 31, 2006. This amount may be limited on an annual basis due to the change in ownership during fiscal 2005. They begin to expire in 2010.

The Company has wage tax credits in the amount of $8,587 that expire in 2018 and alternative minimum tax credits in the amount of $76,203 that carryforward indefinitely.

21. Related Party Transactions

In addition to an annual directors fee of $10,000 effective September 2004 and payment of fees for attending board meetings in the amount of $1,000, for each meeting attended, for the fiscal years ended March 31, 2005 and 2004, various former directors received fees for their services on various committees of the Company. The expenses paid in connection with services rendered for committees by such former directors amounted to $33,253 and $77,201 for the fiscal years ended March 31, 2005 and 2004, respectively.

F-18

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004

22. Quarterly Results (unaudited)

Summary data relating to the results of operations for each quarter for the fiscal years ended March 31, 2006 and 2005 follows:


	Three Months Ended
	June 30			Sept. 30			Dec. 31		March 31

Fiscal year 2006
Security officer service revenue	$	20,816,042		$	21,844,720		$	21,316,977	$	20,880,241
Administrative service revenue		92,595			88,127			86,587		83,326
Total revenue		20,908,637			21,932,847			21,403,564		20,963,567
Gross profit		2,722,081			3,139,834			2,952,171		2,606,273
Net income (loss)		250,182			(278,474	)		301,147		(372,450	)
Net income (loss)
per common share (basic)		0.03			(0.03	)		0.03		(0.04	)
per common share (diluted)		0.03			n/a			0.03		(0.04	)
Fiscal year 2005
Security officer service revenue		19,087,924			20,373,272			20,172,717		19,690,847
Administrative service revenue		80,823			81,899			84,907		82,355
Total revenue		19,168,747			20,455,171			20,257,624		19,773,202
Gross profit		2,379,967			2,932,873			2,821,125		2,388,561
Net income (loss)		(440,048	)		(112,862	)		183,997		(21,342	)
Net income (loss)
per common share (basic)		(0.08	)		(0.02	)		0.02		0.00
per common share (diluted)		n/a			n/a			0.02		0.00

The second quarter 2006 includes an additional provision for bad debts of $850,000 related to the filing by Delta Air Lines and Northwest Airlines of voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

The fourth quarter 2006 loss includes: (i) approximately $560,000 of professional fees related to the Company entering into a consulting agreement with Giuliani Security & Safety LLC, a leading security consulting firm and (ii) a non-cash charge for recognition of stock-based compensation cost in the amount of $174,620 (net of tax benefit).

The fourth quarter 2005 loss includes: (i) an accrual in the amount of $210,315 arising from the payment by the Company of certain legal fees and expenses primarily in connection with the conversion of the Company’s preferred stock into common stock by certain shareholders and (ii) a non-cash charge for recognition of stock-based compensation cost in the amount of $60,650 (net of tax benefit).

F-19

SCHEDULE II

COMMAND SECURITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2006, 2005 and 2004


	Balance at Beginning of Period		Charged to Costs and Expenses		Against Amounts Due to Administrative Service Clients			Charged to Other Accounts			Recoveries		Accounts Written Off		Uncollectible Balance at End of Period

Year ended March 31, 2006:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable – current
Maturities	$	301,465	$	1,162,173	$	53,960		$	(16,901	)	$	3,991	$	1,163,814	$	332,892

Year ended March 31, 2005:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable – current
Maturities		361,865		277,205		(52,800	)		(17,185	)		55,974		211,646		301,465
Allowance for
billing adjustments		965,373							965,373							—

Year ended March 31, 2004:
Deducted from asset accounts:
Allowance for
doubtful accounts
receivable – current
maturities		2,432,337		154,401		43,015			43,752			198,547		2,113,093		361,865
Allowance for
billing adjustments		1,000,000							34,627							965,373

See auditor’s report

F-20

Exhibit 31.1

Certification (pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended)

I, Barry I. Regenstein certifying individual, certify that:

1. I have reviewed the annual report on Form 10-K of Command Security Corporation;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures 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 annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s’ auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 28, 2006

By: /s/ Barry I. Regenstein

Barry I. Regenstein

Principal Executive Officer

Exhibit 31.2

Certification (pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended)

I, Barry I. Regenstein certifying individual, certify that:

1. I have reviewed the annual report on Form 10-K of Command Security Corporation;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: June 28, 2006

By: /s/ Barry I. Regenstein

Barry I. Regenstein

Principal Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U. S. C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Annual Report on Command Security Corporation (the “Company”) on Form 10-K for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Barry I. Regenstein, President and 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, to the best of my knowledge:

(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 result of operations of the Company.

Date: June 28, 2006

By: /s/ Barry I. Regenstein

Barry I. Regenstein

President and Chief Financial Officer

(Principal Executive Officer)

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U. S. C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(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 result of operations of the Company.

Date: June 28, 2006

By: /s/ Barry I. Regenstein

Barry I. Regenstein

President and Chief Financial Officer

(Principal Financial Officer)

Exhibit A

COMMAND SECURITY CORPORATION

2005 STOCK INCENTIVE PLAN

ARTICLE I

General

1.1 Purpose

The Command Security Corporation 2005 Stock Incentive Plan (the “Plan”) is designed to provide certain key persons, on whose initiative and efforts the successful conduct of the business of Command Security Corporation (the “Company”) depends, and who are responsible for the management, growth and protection of the business of the Company, with incentives to: (a) enter into and remain in the service of the Company or a Company subsidiary, (b) acquire a proprietary interest in the success of the Company, (c) maximize their performance and (d) enhance the long-term performance of the Company (whether directly or indirectly through enhancing the long-term performance of a Company subsidiary ). The Plan is also designed to provide certain “performance-based” compensation to these key persons.

1.2 Administration

(a) Administration by Committee; Constitution of Committee . The Plan shall be administered by the compensation committee of the Board of Directors of the Company (the “Board”) or such other committee or subcommittee as the Board may designate or as shall be formed by the abstention or recusal of a non-Qualified Member (as defined below) of such committee (the “Committee”). The members of the Committee shall be appointed by, and serve at the pleasure of, the Board. While it is intended that at all times that the Committee acts in connection with the Plan, the Committee shall consist solely of Qualified Members, the number of whom shall not be less than two, the fact that the Committee is not so comprised will not invalidate any grant hereunder that otherwise satisfies the terms of the Plan. A “Qualified Member” is both a “non-employee director” within the meaning of Rule 16b-3 (“Rule 16b-3”) promulgated under the Securities Exchange Act of 1934 (the “1934 Act”) and an “outside director” within the meaning of section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). If the Committee does not exist, or for any other reason determined by the Board, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee.

(b) Committee’s Authority . The Committee shall have the authority (i) to exercise all of the powers granted to it under the Plan, (ii) to construe, interpret and implement the Plan and any Option Certificates executed pursuant to Section 2.1, (iii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules governing its own operations, (iv) to make all determinations necessary or advisable in administering the Plan, (v) to correct any defect, supply any omission and reconcile any inconsistency in the Plan, and (vi) to amend the Plan to reflect changes in applicable law.

(c) Committee Action; Delegation . Actions of the Committee shall be taken by the vote of a majority of its members. Any action may be taken by a written instrument signed by a majority of the Committee members, and action so taken shall be fully as effective as if it had been taken by a vote at a meeting. Notwithstanding the foregoing or any other provision of the Plan, the Committee or, pursuant to Section 1.2(a), the Board, may delegate to one or more officers of the Company the authority to designate the individuals (other than such officer(s)), among those eligible to receive options pursuant to the terms of the Plan, who will receive options under the Plan and the size of each such option, to the fullest extent permitted under the New York Business Corporation Law (or any successor provision thereto).

(d) Determinations Final . The determination of the Committee on all matters relating to the Plan or any Option Certificate shall be final, binding and conclusive.

(e) Limit on Committee Members’ Liability . No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any award thereunder.

1.3 Persons Eligible for Awards

The persons eligible to receive awards under the Plan are those officers, directors (whether or not they are employed by the Company), and executive, managerial, professional or administrative employees of, and consultants to, the Company and its subsidiaries (collectively, “key persons”) as the Committee in its sole discretion shall select. No incentive stock option may be granted to a person who is not an employee of the Company on the date of grant.

1.4 Types of Awards Under Plan

Awards may be made under the Plan in the form of (a) incentive stock options and (b) non-qualified stock options, as more fully set forth in Article II. The terms “award” and “option” mean either of the foregoing.

1.5 Shares Available for Awards

(a) Aggregate Number Available; Certificate Legends . The total number of shares of common stock of the Company (“Common Stock”) with respect to which awards may be granted pursuant to the Plan shall not exceed the sum of 1,000,000 shares. Shares issued pursuant to the Plan may be authorized but unissued Common Stock, authorized and issued Common Stock held in the Company’s treasury or Common Stock acquired by the Company for the purposes of the Plan. The Committee may direct that any stock certificate evidencing shares issued pursuant to the Plan shall bear a legend setting forth such restrictions on transferability as may apply to such shares.

(b) Adjustment Upon Changes in Common Stock . Upon certain changes in Common Stock, the number of shares of Common Stock available for issuance with respect to awards that may be granted under the Plan pursuant to Section 1.5(a), shall be adjusted pursuant to Section 3.5(a).

(c) Certain Shares to Become Available Again . Any shares of Common Stock that are subject to an award under the Plan and that remain unissued upon the cancellation or termination of such award for any reason whatsoever shall again become available for awards under the Plan.

(d) Individual Limits . Except for the limits set forth in this Section 1.5(d) and in Section 2.2(e), no provision of this Plan shall be deemed to limit the number or value of shares with respect to which the Committee may make awards to any eligible person. Subject to adjustment as provided in Section 3.5(a), the total number of shares of Common Stock with respect to which awards may be granted to any one employee of the Company or a subsidiary during any one calendar year shall not exceed 500,000 shares. Stock options granted and subsequently canceled or deemed to be canceled in a calendar year count against this limit even after their cancellation.

1.6 Definitions of Certain Terms

(a) The “Fair Market Value” of a share of Common Stock on any day shall be the closing price as reported for such day in The Wall Street Journal or, if no such price is reported for such day, the average of the high bid and low asked price of Common Stock as reported for such day. If no quotation is made for the applicable day, the Fair Market Value of a share of Common Stock on such day shall be determined in the manner set forth in the preceding sentence using quotations for the next preceding day for which there were quotations, provided that such quotations shall have been made within the ten (10) business days preceding the applicable day. Notwithstanding the foregoing, if deemed necessary or appropriate by the Committee, the Fair Market Value of a share of Common Stock on any day shall be determined by the Committee. In no event shall the Fair Market Value of any share of Common Stock be less than its par value.

(b) The term “incentive stock option” means an option that is intended to qualify for special federal income tax treatment pursuant to sections 421 and 422 of the Code as now constituted or subsequently amended, or pursuant to a successor provision of the Code, and which is so designated in the applicable Option Certificate. Any option that is not specifically designated as an incentive stock option shall under no circumstances be considered an incentive stock option. Any option that is not an incentive stock option is referred to herein as a “non-qualified stock option.”

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(c) A grantee shall be deemed to have a “termination of employment” upon (i) the date the grantee ceases to be employed by, or to provide consulting services for, the Company or any Company subsidiary, or any corporation (or any of its subsidiaries) which assumes the grantee’s award in a transaction to which section 424(a) of the Code applies; or (ii) the date the grantee ceases to be a Board member, provided, however, that in the case of a grantee (x) who is, at the time of reference, both an employee or consultant and a Board member, or (y) who ceases to be engaged as an employee, consultant or Board member and immediately is engaged in another of such relationships with the Company or any Company subsidiary, the grantee shall be deemed to have a “termination of employment” upon the later of the dates determined pursuant to subparagraphs (i) and (ii) above. For purposes of clause (i) above, a grantee who continues his or her employment or consulting relationship with a Company subsidiary subsequent to its sale by the Company shall have a termination of employment upon the date of such sale. The Committee may in its discretion determine whether any leave of absence constitutes a termination of employment for purposes of the Plan and the impact, if any, of any such leave of absence on awards theretofore made under the Plan.

(d) The terms “parent corporation” and “subsidiary corporation” shall have the meanings given them in sections 424(e) and (f) of the Code, respectively.

(e) The term “employment” shall be deemed to mean an employee’s employment with, or a consultant’s provision of services to, the Company or any Company subsidiary and each Board member’s service as a Board member.

(f) The term “cause” in connection with a termination of employment by reason of a dismissal for cause shall mean:

(i) to the extent that there is an employment, severance or other agreement governing the relationship between the grantee and the Company or a Company subsidiary, which agreement contains a definition of “cause,” cause shall consist of those acts or omissions that would constitute “cause” under such agreement; and otherwise,

(ii) the grantee’s termination of employment by the Company or an affiliate on account of any one or more of the following:

(A) grantee’s willful and intentional repeated failure or refusal, continuing after notice that specifically identifies the breach(es) complained of, to perform substantially his or her material duties, responsibilities and obligations (other than a failure resulting from grantee’s incapacity due to physical or mental illness or other reasons beyond the control of grantee), and which failure or refusal results in demonstrable direct and material injury to the Company;

(B) any willful and intentional act or failure to act involving fraud, misrepresentation, theft, embezzlement, dishonesty or moral turpitude (collectively, “Fraud”) which results in demonstrable direct and material injury to the Company; and

(C) conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved or which is a misdemeanor in the jurisdiction involved but which involves Fraud.

For purposes of determining whether cause exists, no act, or failure to act, on grantee’s part shall be deemed “willful” or “intentional” unless done, or omitted to be done, by grantee in bad faith, and without reasonable belief that his or her action or omission was in the best interests of the Company.

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Any rights the Company may have hereunder in respect of the events giving rise to cause shall be in addition to the rights the Company may have under any other agreement with a grantee or at law or in equity. Any determination of whether a grantee’s employment is (or is deemed to have been) terminated for cause for purposes of the Plan or any award hereunder shall be made by the Committee in its discretion. If, subsequent to a grantee’s voluntary termination of employment or involuntary termination of employment without cause, it is discovered that the grantee’s employment could have been terminated for cause, the Committee may deem such grantee’s employment to have been terminated for cause. A grantee’s termination of employment for cause shall be effective as of the date of the occurrence of the event giving rise to cause, regardless of when the determination of cause is made.

ARTICLE II

Awards Under the Plan

2.1 Certificates Evidencing Options

Each award granted under the Plan shall be evidenced by a written certificate (“Option Certificate”) which shall contain such provisions as the Committee may in its sole discretion deem necessary or desirable. By accepting an award pursuant to the Plan, a grantee thereby agrees that the award shall be subject to all of the terms and provisions of the Plan and the applicable Option Certificate.

2.2 Grant of Stock Options

(a) Stock Option Grants . The Committee may grant incentive stock options and non-qualified stock options (collectively, “options”) to purchase shares of Common Stock from the Company, to such key persons, and in such amounts and subject to such vesting and forfeiture provisions and other terms and conditions, as the Committee shall determine in its sole discretion, subject to the provisions of the Plan.

(b) Option Exercise Price . Each Option Certificate shall set forth the amount (the “option exercise price”) payable by the grantee to the Company upon exercise of the option evidenced thereby. The option exercise price per share shall be determined by the Committee in its sole discretion; provided, however, that the option exercise price shall be at least 100% of the Fair Market Value of a share of Common Stock on the date the option is granted, and provided further that in no event shall the option exercise price be less than the par value of a share of Common Stock.

(c) Exercise Period . Each Option Certificate shall set forth the periods during which the option evidenced thereby shall be exercisable, whether in whole or in part. Such periods shall be determined by the Committee in its sole discretion; provided, however, that no stock option shall be exercisable more than 10 years after the date of grant. (See the default exercise period provided for under Sections 2.3(a) and (b).)

(d) Reload Options . The Committee may in its sole discretion include in any Option Certificate with respect to an option (the “original option”) a provision that an additional option (the “reload option”) shall be granted to the grantee if, pursuant to Section 2.3(e)(ii), the grantee delivers shares of Common Stock in partial or full payment of the exercise price of the original option. The reload option shall be for a number of shares of Common Stock equal to the number thus delivered, shall have an exercise price equal to the Fair Market Value of a share of Common Stock on the date of exercise of the original option, and shall have an expiration date no later than the expiration date of the original option. In the event that a Option Certificate provides for the grant of a reload option, such Option Certificate shall also provide that any shares that are delivered pursuant to Section 2.3(e)(ii) in payment of such exercise price shall have been held for at least six months (or such other period as the Committee may from time to time determine).

(e) Incentive Stock Option Limitation: $100,000 Limitation . To the extent that the aggregate Fair Market Value (determined as of the time the option is granted) of the stock with respect to which incentive stock options are first exercisable by any employee during any calendar year shall exceed $100,000, or such other amount as may be specified from time to time under section 422 of the Code, such options shall be treated as non-qualified stock options.

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(f) Incentive Stock Option Limitation: 10% Owners . Notwithstanding the provisions of paragraphs (d) and (e) of this Section 2.2, an incentive stock option may not be granted under the Plan to an individual who, at the time the option is granted, owns stock possessing more than 10% of the total combined voting power of all classes of stock of his or her employer corporation or of its parent or subsidiary corporations (as such ownership may be determined for purposes of section 422(b)(6) of the Code) unless (i) at the time such incentive stock option is granted the option exercise price is at least 110% of the Fair Market Value of the shares subject thereto and (ii) the incentive stock option by its terms is not exercisable after the expiration of 5 years from the date it is granted.

2.3 Exercise of Options

Subject to the other provisions of this Article II, each option granted under the Plan shall be exercisable as follows:

(a) Beginning of Exercise Period . Unless the applicable Option Certificate otherwise provides, an option shall become exercisable with respect to one quarter (1/4) of the shares subject to such option on each of the first four anniversaries of the date of grant.

(b) End of Exercise Period . Unless the applicable Option Certificate otherwise provides, once an installment becomes exercisable, it shall remain exercisable until the earlier of (i) the tenth anniversary of the date of grant of the award or (ii) the expiration, cancellation or termination of the award.

(c) Timing and Extent of Exercise . Unless the applicable Option Certificate otherwise provides, an option may be exercised from time to time as to all or part of the shares as to which such award is then exercisable.

(d) Notice of Exercise . An option shall be exercised by the filing of a written notice with the Company or the Company’s designated exchange agent (the “exchange agent”), on such form and in such manner as the Committee shall in its sole discretion prescribe.

(e) Payment of Exercise Price . Any written notice of exercise of an option shall be accompanied by payment for the shares being purchased. Such payment shall be made: (i) by certified or official bank check (or the equivalent thereof acceptable to the Company or its exchange agent) for the full option exercise price; or (ii) with the consent of the Committee, by delivery of shares of Common Stock owned by the grantee (whether acquired by option exercise or otherwise, provided that if such shares were acquired pursuant to the exercise of a stock option, they were acquired at least six months prior to the option exercise date or such other period as the Committee may from time to time determine) having a Fair Market Value (determined as of the exercise date) equal to all or part of the option exercise price and a certified or official bank check (or the equivalent thereof acceptable to the Company or its exchange agent) for any remaining portion of the full option exercise price; or (iii) at the discretion of the Committee and to the extent permitted by law, by such other provision, consistent with the terms of the Plan, as the Committee may from time to time prescribe.

(f) Delivery of Certificates Upon Exercise . Promptly after receiving payment of the full option exercise price, the Company or its exchange agent shall, subject to the provisions of Section 3.2, deliver to the grantee or to such other person as may then have the right to exercise the award, certificate or certificates for the shares of Common Stock for which the award has been exercised. If the method of payment employed upon option exercise so requires, and if applicable law permits, a grantee may direct the Company, or its exchange agent, as the case may be, to deliver the stock certificate(s) to the grantee’s stockbroker.

(g) No Shareholder Rights . No grantee of an option (or other person having the right to exercise such award) shall have any of the rights of a shareholder of the Company with respect to shares subject to such award until the issuance of a stock certificate to such person for such shares. Except as otherwise provided in Section 1.5(b), no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued.

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2.4 Termination of Employment; Death Subsequent to a Termination of Employment

(a) General Rule . Except to the extent otherwise provided in paragraphs (b), (c) or (d) of this Section 2.4, a grantee who incurs a termination of employment may exercise any outstanding option on the following terms and conditions: (i) exercise may be made only to the extent that the grantee was entitled to exercise the award on the termination of employment date; and (ii) exercise must occur within three months after termination of employment but in no event after the original expiration date of the award.

(b) Dismissal for Cause; Resignation . If a grantee incurs a termination of employment as the result of a dismissal for cause, all options not theretofore exercised shall terminate upon the commencement of business on the date of the grantee’s termination of employment.

(c) Disability . If a grantee incurs a termination of employment by reason of a disability (as defined below), then any outstanding option shall be exercisable on the following terms and conditions: (i) exercise may be made only to the extent that the grantee was entitled to exercise the award on the termination of employment date; and (ii) exercise must occur by the earlier of (A) the first anniversary of the grantee’s termination of employment, or (B) the original expiration date of the award. For this purpose “disability” shall mean: (x) except in connection with an incentive stock option, any physical or mental condition that would qualify a grantee for a disability benefit under the long-term disability plan maintained by the Company or, if there is no such plan, a physical or mental condition that prevents the grantee from performing the essential functions of the grantee’s position (with or without reasonable accommodation) for a period of six consecutive months and (y) in connection with an incentive stock option, a disability described in section 422(c)(6) of the Code. The existence of a disability shall be determined by the Committee in its absolute discretion.

(d) Death .

(i) Termination of Employment as a Result of Grantee’s Death . If a grantee incurs a termination of employment as the result of death, then any outstanding option shall be exercisable on the following terms and conditions: (A) exercise may be made only to the extent that the grantee was entitled to exercise the award on the date of death; and (B) exercise must occur by the earlier of (1) the first anniversary of the grantee’s death, or (2) the original expiration date of the award.

(ii) Death Subsequent to a Termination of Employment . If a grantee dies subsequent to incurring a termination of employment but prior to the expiration of the exercise period with respect to a stock option (as provided by paragraphs (a) or (c) above), then the award shall remain exercisable until the earlier to occur of (A) the first anniversary of the grantee’s death or (B) the original expiration date of the award.

(iii) Restrictions on Exercise Following Death . Any such exercise of an award following a grantee’s death shall be made only by the grantee’s executor or administrator or other duly appointed representative reasonably acceptable to the Committee, unless the grantee’s will specifically disposes of such award, in which case such exercise shall be made only by the recipient of such specific disposition. If a grantee’s personal representative or the recipient of a specific disposition under the grantee’s will shall be entitled to exercise any award pursuant to the preceding sentence, such representative or recipient shall be bound by all the terms and conditions of the Plan and the applicable Option Certificate which would have applied to the grantee including, without limitation, the provisions of Sections 3.2.

(e) Special Rules for Incentive Stock Options . No option that remains exercisable for more than three months following a grantee’s termination of employment for any reason other than death (including death within three months after the termination of employment or within one year after a termination due to disability) or disability, or for more than one year following a grantee’s termination of employment as the result of disability, may be treated as an incentive stock option.

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(f) Committee Discretion . The Committee may waive or modify the application of the foregoing provisions of this Section 2.4.

2.5 Transferability of Options

Except as otherwise provided in an applicable Option Certificate evidencing an option, during the lifetime of a grantee, each option granted to a grantee shall be exercisable only by the grantee and no option shall be assignable or transferable otherwise than by will or by the laws of descent and distribution. The Committee may, in any applicable Option Certificate evidencing an option (other than an incentive stock option to the extent inconsistent with the requirements of section 422 of the Code applicable to incentive stock options), permit a grantee to transfer all or some of the options to (A) the grantee’s spouse, children or grandchildren (“Immediate Family Members”), (B) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (C) other parties approved by the Committee in its absolute discretion. Following any such transfer, any transferred options shall continue to be subject to the same terms and conditions as were applicable immediately prior to the transfer.

2.6 Right of Recapture

If at any time after the date on which a grantee has been granted or become vested in an award pursuant to the achievement of performance goals , the Committee determines that the earlier determination as to the achievement of the performance goals was based on incorrect data and that in fact the performance goals had not been achieved or had been achieved to a lesser extent than originally determined, then (i) any award or portion of an award granted based on such incorrect determination shall be forfeited, and (ii) any award or portion of an award that became vested based on such incorrect determination shall be deemed to be not vested.

ARTICLE III

Miscellaneous

3.1 Amendment of the Plan; Modification of Awards

(a) Amendment of the Plan . Subject to Section 3.1(b), the Board may from time to time suspend, discontinue, revise or amend the Plan in any respect whatsoever, except that no such amendment shall materially impair any rights or materially increase any obligations under any award theretofore made under the Plan without the consent of the grantee (or, upon the grantee’s death, the person having the right to exercise the award). For purposes of this Section 3.1, any action of the Board or the Committee that in any way alters or affects the tax treatment of any award or that in the sole discretion of the Board is necessary to prevent an award from being subject to tax under Section 409A of the Code shall not be considered to materially impair any rights of any grantee.

(b) Shareholder Approval Requirement . Shareholder approval shall be required with respect to any amendment to the Plan (i) which increases the aggregate number of shares which may be issued pursuant to incentive stock options or changes the class of employees eligible to receive such options, (ii) which otherwise materially increases the benefits under the Plan, (iii) to the extent required by stock exchange rules, or (iv) to the extent the Board determines that shareholder approval is necessary to enable awards under the Plan to comply with Sections 422 or 162(m) of the Code.

(c) Modification of Awards . The Committee may cancel any award under the Plan. The Committee also may amend any outstanding Option Certificate, including, without limitation, by amendment which would: (i) accelerate the time or times at which the award becomes vested and exercisable; (ii) waive or amend any goals, restrictions or conditions set forth in the Option Certificate; or (iii) waive or amend the operation of Section 2.4 with respect to the termination of the award upon termination of employment, provided however, that no such amendment may lower the exercise price of an outstanding option. However, any such cancellation or amendment (other than an amendment pursuant to Section 3.5) that materially impairs the rights or materially increases the obligations of a grantee under an outstanding award shall be made only with the consent of the grantee (or, upon the grantee’s death, the person having the right to exercise the award). Under no circumstances may the Committee modify an award in a manner that would cause the award to be subject to tax under Section 409A of the Code.

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3.2 Consent Requirement

(a) No Plan Action without Required Consent . If the Committee shall at any time determine that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any award under the Plan, the issuance or purchase of shares or other rights thereunder, or the taking of any other action thereunder (each such action being hereinafter referred to as a “Plan Action”), then such Plan Action shall not be taken, in whole or in part, unless and until such Consent shall have been effected or obtained to the full satisfaction of the Committee.

(b) Consent Defined . The term “Consent” as used herein with respect to any Plan Action means (i) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or under any federal, state or local law, rule or regulation, (ii) any and all written agreements and representations by the grantee with respect to the disposition of shares, or with respect to any other matter, which the Committee shall deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made and (iii) any and all consents, clearances and approvals in respect of a Plan Action by any governmental or other regulatory bodies.

3.3 Requirement of Notification Upon Disqualifying Disposition Under Section 421(b) of the Code

Each grantee of an incentive stock option shall notify the Company of any disposition of shares of Common Stock issued pursuant to the exercise of such option under the circumstances described in section 421(b) of the Code (relating to certain disqualifying dispositions), within 10 days of such disposition.

3.4 Withholding Taxes

The Company shall be entitled to require as a condition of delivery of shares of Common Stock upon exercise of an option that the grantee remit to the Company an amount sufficient, in the opinion of the Company, to satisfy all federal, state and other governmental tax withholding requirements related thereto. With the approval of the Committee, which the Committee shall have sole discretion whether or not to give, the grantee may satisfy the foregoing condition by electing to have the Company withhold from delivery shares having a value equal to the amount of tax to be withheld. Such shares shall be valued at their Fair Market Value as of the date on which the amount of tax to be withheld is determined. Fractional share amounts shall be settled in cash. Such a withholding election may be made with respect to all or any portion of the shares to be delivered pursuant to an award.

3.5 Adjustment Upon Changes in Common Stock

(a) Shares Available for Options . In the event of any change in the number of shares of Common Stock outstanding by reason of any stock dividend or split, reverse stock split, recapitalization, merger, consolidation, combination or exchange of shares or similar corporate change, the maximum number of shares of Common Stock with respect to which the Committee may grant awards under Article II hereof, as described in Section 1.5(a), and the individual annual limit described in Section 1.5(d), shall be appropriately adjusted by the Committee. In the event of any change in the number of shares of Common Stock outstanding by reason of any other event or transaction, the Committee may, but need not, make such adjustments in the number and class of shares of Common Stock with respect to which awards: (i) may be granted under Article II hereof and (ii) granted to any one employee of the Company or a subsidiary during any one calendar year, in each case as the Committee may deem appropriate.

(b) Outstanding Options -- Increase or Decrease in Issued Shares Without Consideration . Subject to any required action by the shareholders of the Company, in the event of any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend (but only on the shares of Common Stock), or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company, the Committee shall proportionally adjust the number of shares of Common Stock subject to each outstanding option and the exercise price-per-share of Common Stock of each such option.

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(c) Outstanding Options -- Certain Mergers . Subject to any required action by the shareholders of the Company, in the event that the Company shall be the surviving corporation in any merger or consolidation (except a merger or consolidation as a result of which the holders of shares of Common Stock receive securities of another corporation), each option outstanding on the date of such merger or consolidation shall pertain to and apply to the securities which a holder of the number of shares of Common Stock subject to such option would have received in such merger or consolidation.

(d) Outstanding Options -- Certain Other Transactions . In the event of (i) a dissolution or liquidation of the Company, (ii) a sale of all or substantially all of the Company’s assets, (iii) a merger or consolidation involving the Company in which the Company is not the surviving corporation or (iv) a merger or consolidation involving the Company in which the Company is the surviving corporation but the holders of shares of Common Stock receive securities of another corporation and/or other property, including cash, the Committee shall, in its absolute discretion, have the power to:

(A) cancel, effective immediately prior to the occurrence of such event, each option outstanding immediately prior to such event (whether or not then exercisable), and, in full consideration of such cancellation, pay to the grantee to whom such option was granted an amount in cash, for each share of Common Stock subject to such option equal to the excess of (x) the value, as determined by the Committee in its absolute discretion, of the property (including cash) received by the holder of a share of Common Stock as a result of such event over (y) the exercise price of such option; or

(B) provide for the exchange of each option outstanding immediately prior to such event (whether or not then exercisable) for an option on some or all of the property which a holder of the number of shares of Common Stock subject to such option would have received and, incident thereto, make an equitable adjustment as determined by the Committee in its absolute discretion in the exercise price of the option, or the number of shares or amount of property subject to the option or, if appropriate, provide for a cash payment to the grantee to whom such option was granted in partial consideration for the exchange of the option.

(e) Outstanding Options -- Other Changes . In the event of any change in the capitalization of the Company or a corporate change other than those specifically referred to in Sections 3.5(b), (c) or (d) hereof, the Committee may, in its absolute discretion, make such adjustments in the number and class of shares subject to options outstanding on the date on which such change occurs and in the per-share exercise price of each such option as the Committee may consider appropriate to prevent dilution or enlargement of rights. In addition, if and to the extent the Committee determines it is appropriate, the Committee may elect to cancel each option outstanding immediately prior to such event (whether or not then exercisable), and, in full consideration of such cancellation, pay to the grantee to whom such option was granted an amount in cash, for each share of Common Stock subject to such option equal to the excess of (i) the Fair Market Value of Common Stock on the date of such cancellation over (ii) the exercise price of such option.

(f) No Other Rights . Except as expressly provided in the Plan, no grantee shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger or consolidation of the Company or any other corporation. Except as expressly provided in the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to an award or the exercise price of any option.

3.6 Limitations Imposed by Section 162(m)

Notwithstanding any other provision hereunder, if and to the extent that the Committee determines the Company’s federal tax deduction in respect of an award may be limited as a result of section 162(m) of the Code, the Committee may take the following actions: The Committee may delay the exercise of such options and, in lieu of such exercise, the Committee shall credit the Fair Market Value of the Common Stock that would be payable to the grantee upon such exercise to a book account. The Committee may credit additional amounts to such book account as it may determine in its sole discretion. The amounts credited to any such book account shall be paid to the grantee on the date that is six months after the grantee’s termination of employment. Any book account created hereunder shall represent only an unfunded, unsecured promise by the Company to pay the amount credited thereto to the grantee in the future. The amount credited to any such book account shall not be transferable by the grantee other than by will or laws of descent and distribution

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3.7 Right of Discharge Reserved

Nothing in the Plan or in any Option Certificate shall confer upon any grantee the right to continue employment with the Company or a subsidiary of the Company or affect any right which the Company or a subsidiary of the Company may have to terminate such employment.

3.8 Nature of Payments

(a) Consideration for Services Performed . Any and all grants of awards and issuances of shares of Common Stock under the Plan shall be in consideration of services performed for the Company by the grantee.

(b) Not Taken into Account for Benefits . All such grants and issuances shall constitute a special incentive payment to the grantee and shall not be taken into account in computing the amount of salary or compensation of the grantee for the purpose of determining any benefits under any pension, retirement, profit-sharing, bonus, life insurance or other benefit plan of the Company or under any agreement between the Company and the grantee, unless such plan or agreement specifically otherwise provides.

3.9 Non-Uniform Determinations

The Committee’s determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or who are eligible to receive, awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Option Certificates, as to (a) the persons to receive awards under the Plan, (b) the terms and provisions of awards under the Plan, and (c) the treatment of leaves of absence pursuant to Section 1.6(c).

3.10 Other Payments or Awards

Nothing contained in the Plan shall be deemed in any way to limit or restrict the Company from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect.

3.11 Headings

Any section, subsection, paragraph or other subdivision headings contained herein are for the purpose of convenience only and are not intended to expand, limit or otherwise define the contents of such subdivisions.

3.12 Effective Date and Term of Plan

(a) Adoption; Shareholder Approval . The Plan was adopted by the Board as of July 29, 2005, subject to approval by the Company’s shareholders. All awards under the Plan prior to such shareholder approval are subject in their entirety to such approval. If such approval is not obtained prior to the first anniversary of the date of adoption of the Plan, the Plan and all awards thereunder shall terminate on that date.

(b) Termination of Plan . Unless sooner terminated by the Board or pursuant to paragraph (a) above, the Plan shall terminate on the tenth anniversary of the adoption of the Plan by the Board, and no such options shall thereafter be granted under the Plan. All options granted under the Plan prior to the termination of the Plan shall remain in effect until such options have been satisfied or terminated in accordance with the terms and provisions of the Plan and the applicable Option Certificates.

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3.13 Restriction on Issuance of Stock Pursuant to Awards

The Company shall not permit any shares of Common Stock to be issued pursuant to Awards granted under the Plan unless such shares of Common Stock are fully paid and non-assessable, within the meaning of the New York Business Corporation Law.

3.14 Deferred Compensation

The Plan is intended to comply with the requirements of Section 409A of the Code so as not to be subject to tax under Section 409A, and shall be interpreted accordingly. After final guidance is issued by the Internal Revenue Service with respect to Section 409A, the Board will amend the Plan as necessary to ensure compliance with Section 409A.

3.15 Governing Law

Except to the extent preempted by any applicable federal law, the Plan will be construed and administered in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws.

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