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Form 10QSB for N-VIRO INTERNATIONAL CORP

Quarterly Report

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FORWARD-LOOKING STATEMENTS

This 10-QSB contains statements that are forward-looking. We caution that words used in this document such as "expects," "anticipates," "believes," "may," and "optimistic," as well as similar words and expressions used herein, identify and refer to statements describing events that may or may not occur in the future. These forward-looking statements and the matters to which they refer are subject to considerable uncertainty that may cause actual results to be materially different from those described herein. There are numerous factors that could cause actual results to be different than those anticipated or predicted by us, including: (i) a deterioration in economic conditions in general; (ii) a decrease in demand for our products or services in particular;
(iii) our loss of a key employee or employees; (iv) regulatory changes, including changes in environmental regulations, that may have an adverse affect on the demand for our products or services; (v) increases in our operating expenses resulting from increased costs of labor and/or consulting services;
(vi) our inability to exploit existing or secure additional sources of revenues or capital to fund operations; (vii) a failure to collect upon or otherwise secure the benefits of existing contractual commitments with third parties, including our customers; and (viii) other factors and risks identified in this Form 10-QSB, including under the caption "Risk Factors." This list provides examples of factors that could affect the results described by forward-looking statements contained in this Form 10-QSB; however, this list is not exhaustive and many other factors could impact our business and it is impossible to predict with any accuracy which factors could result in negative impacts. Although we believe that the forward-looking statements contained in this Form 10-QSB are reasonable, we cannot provide you with any guarantee that the anticipated results will not be adverse and that the anticipated results will be achieved. All forward-looking statements in this Form 10-QSB are expressly qualified in their entirety by the cautionary statements contained in this section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Form 10-QSB. In addition to the risks listed above, other risks may arise in the future, and we disclaim any obligation to update information contained in any forward-looking statement.

OVERVIEW

We were incorporated in Delaware in April, 1993, and became a public company in October 1993. We own and license the N-Viro Process, a patented technology to treat and recycle wastewater sledges and other bio-organic wastes, utilizing certain alkaline and mineral by-products produced by the cement, lime, electric utilities and other industries.

Our business strategy went from being a low cost provider of a process to marketing the N-Viro Process, which produces an "exceptional quality" sludge product, as defined in the 40 CFR Part 503 Sludge Regulations under the Clean Water Act of 1987 (the "Part 503 Regs"), with multiple commercial uses. In this strategy, the primary focus is to identify allies, public and private, who will build and operate an N-Viro facility. To date, our revenues primarily have been derived from licensing the N-Viro Process to treat and recycle wastewater sludge generated by municipal wastewater treatment plants and from the sale to licensees of the alkaline admixture used in the N-Viro Process. We have also operated N-Viro facilities for third parties on a start-up basis and currently operate one N-Viro facility on a contract management basis. At the end of 2006 we acquired and now manage a merchant facility which accepts wastewater sludge from several sources in the Orlando area.

RESULTS OF OPERATIONS

Total revenues were $1,132,000 for the quarter ended March 31, 2007 compared to $1,028,000 for the same period of 2006. The net increase in revenue is due primarily to an increase in facility management revenue and service fees generated for the management of alkaline admixture. Our cost of revenues increased to $887,000 in 2007 from $677,000 for the same period in 2006, and the gross profit percentage decreased to 22% from 34% for the quarters ended March 31, 2007 and 2006, respectively. This decrease in gross profit percentage is primarily due to the decreased profitability of the facility management fee operations, primarily as the result of the acquisition of the Florida operations at the end of 2006, which operate at a lower gross profit margin than our other management fee facility. Operating expenses decreased for the comparative period. These changes collectively resulted in a net loss of approximately $243,000 for the quarter ended March 31, 2007 compared to a net loss of $132,000 for the same period in 2006, an increase in the net loss of approximately $111,000.

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2007 WITH THREE MONTHS ENDED MARCH

31, 2006

Our overall revenue increased $103,000, or 10%, to $1,132,000 for the quarter ended March 31, 2007 from $1,029,000 for the quarter ended March 31, 2006. The net increase in revenue was due primarily to the following:

a) Sales of alkaline admixture decreased $136,000 from the same period ended in 2006;

b) Revenue from the service fees for the management of alkaline admixture increased $91,000 from the same period ended in 2006 - this increase was the result of the acquisition of the Florida operation, purchased in late 2006;

c) Our processing revenue, including facility management revenue, showed a net increase of $201,000 over the same period ended in 2006 - of this increase, $303,000 was contributed by the acquisition of the Florida operation in late 2006;

d) Miscellaneous revenues decreased $22,000 from the same period ended in 2006; and

e) Research and development revenue was $-0- in 2007, a decrease of $30,000 from the same period ended in 2006.

Our gross profit decreased $107,000, or 30%, to $245,000 for the quarter ended March 31, 2007 from $352,000 for the quarter ended March 31, 2006, and the gross profit margin decreased to 22% from 34% for the same periods. The decrease in gross profit margin is primarily due to the decrease in profitability of the facility management fee operations. Gross revenue decreased $124,000 from our Toledo operation, contributing approximately $40,000 of this decrease in gross profit. The gross revenue from the Toledo operation decreased in 2007 compared to the first quarter of 2006 because of unscheduled repairs and a reduction in the volume of incoming sludge processing due to the weather. The balance of the decrease, or $67,000, was primarily the result of the decrease in sales of alkaline admixture and miscellaneous revenues. The acquisition of the Florida operation in late 2006 added approximately $13,000 on overall revenue of $390,000, but was an increase of approximately $46,000 over the same period in 2006 when it was operated by a different company.

Our operating expenses decreased $3,000, or 0.5%, to $479,000 for the quarter ended March 31, 2007 from $482,000 for the quarter ended March 31, 2006. The decrease was primarily due to an increase of approximately $33,000 in employee payroll and related expenses and $7,000 in consulting expense, offset by a decrease of $19,000 in director-related expenses and $14,000 in travel and sales-related expenses. The acquisition of the Florida operation had an immaterial effect on the change in operating expenses from 2006 to 2007.

As a result of the foregoing factors, we recorded an operating loss of $234,000 for the quarter ended March 31, 2007 compared to an operating loss of $129,000 for the quarter ended March 31, 2006, an increase in the loss of approximately $105,000.

Our net nonoperating expense increased by $7,000 to net nonoperating expense of $9,000 for the quarter ended March 31, 2007 from net nonoperating expense of $2,000 for the quarter ended March 31, 2006. The increase in nonoperating expense was primarily due to an increase in interest expense of $8,000 for the financing of the acquisition of the Florida operation in December 2006.

We recorded a net loss of approximately $243,000 for the quarter ended March 31, 2007 compared to a net loss of $132,000 for the same period ended in 2006, an increase in the loss of approximately $111,000. Total non-cash expenses for depreciation, amortization and stock or stock options charges accounted for approximately $168,000 of the loss for the quarter ended March 31, 2007. Non-cash expenses for the same period in 2006 totaled approximately $145,000.

For the quarter ended March 31, 2007 and 2006, we have not fully recognized the tax benefit of the losses incurred in prior periods. Accordingly, our effective tax rate for each period was zero.

LIQUIDITY AND CAPITAL RESOURCES

We had a working capital deficit of approximately $514,000 at March 31, 2007, compared to a working capital deficit of $350,000 at December 31, 2006, resulting in a decrease in working capital of $165,000. Current assets at March 31, 2007 included cash and investments of approximately $269,000 (including restricted cash of approximately $132,000), which is a decrease of $25,000 from December 31, 2006.

Our cash flow provided by operations for the first three months ended March 31, 2007 was approximately $81,000, a decrease of approximately $2,000 from 2006. This decrease was principally due to the positive change in working capital of approximately $46,000, increased by $38,000 in the amount of stock, warrants and stock options issued for fees and services from 2006 and further increased by $25,000 in other non-cash charges to earnings, decreased by $111,000 for the increase in the net loss.

We presently have a $695,000 credit facility with Monroe Bank + Trust, or the Bank. This senior debt credit facility is comprised of a $295,000 four year term note at 7.5% and a line of credit up to $400,000 at Prime (8.25% at March 31, 2007) plus 1.5% and secured by a first lien on all assets of the Company. Two certificates of deposit totaling $125,000 from the Bank are held as a condition of maintaining the facility. We have currently renewed the line of credit through October 2007, and are not in violation of any financial covenants. At March 31, 2007, we had $165,000 of borrowing capacity under the credit facility. The term note was paid off in March 2007.

In the first quarter 2007, our wholly-owned subsidiary, Bio-Mineral Transportation LLC ("BMT"), borrowed a total of $98,540 from Wachovia Financial Services to purchase a truck that was placed into service during the quarter. A term note was issued at 9.04% for five years and secured by the truck. The total amount owed on all notes held by BMT as of March 31, 2007 was approximately $324,000 and all are expected to be paid in full by April 2012.

In the first quarter 2007, our wholly-owned subsidiary, Florida N-Viro LP ("Florida N-Viro "), borrowed a total of $23,253 from General Motors Acceptance Corporation to purchase a truck that was placed into service during the quarter. A term note was issued at 9.82% for five years and secured by the truck. The total amount owed on all notes held by Florida N-Viro as of March 31, 2007 was approximately $29,000 and all are expected to be paid in full by February 2012.

In early 2006, the dormant Ft. Meade facility, which was owned by Florida N-Viro, was sold to an independent third party, and the proceeds were used to fund operations. On December 28, 2006, we purchased the remaining ownership interest in Florida N-Viro for $500,000 and financed $400,000 of it by delivering a note to the seller, VFL Technology Corporation. The note is at 8% for 10 years, to be paid in annual installments of $59,611.80, subject to an offset for royalties due us under a patent license agreement from the same party. Through March 31, 2007 cash flow from operations of Florida N-Viro has been positive, and we believe that Florida N-Viro will be able to generate enough funds to finance operations through 2007.

The normal collection period for accounts receivable is approximately 30-60 days for the majority of customers. This is a result of the nature of the license contracts, type of customer and the amount of time required to obtain the information to prepare the billing.

We are currently in discussions with several companies in the cement and fuel industries for the development and commercialization of the patented N-Viro fuel technology. There can be no assurance that these discussions will be successful. We continue to focus on the development of regional biosolids processing facilities. Currently we are in negotiations with several privatization firms to permit and develop independent, regional facilities.

For the remainder of 2007, we expect continued improvements in operating results for 2007 primarily due to lowered administrative costs together with existing sources and expected new sources of revenue, strategic relationships and cash from equity issuances. Additionally, market developments and ongoing discussions with companies in the fuel and wastewater industries could provide enhanced liquidity and have a positive impact on 2007 operations.

OFF-BALANCE SHEET ARRANGEMENTS

At March 31, 2007, we did not have any material commercial commitments, including guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

From time to time, during the normal course of business, we may make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include: (i) indemnities to vendors and service providers pertaining to claims based on our negligence or willful misconduct and (ii) indemnities involving the accuracy of representations and warranties in certain contracts. Pursuant to Delaware law, we may indemnify certain officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. We also have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts that we may pay for indemnification purposes. We believe the applicable insurance coverage is generally adequate to cover any estimated potential liability for which we may provide indemnification. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and other guarantees in the accompanying Consolidated Balance Sheets. 

CONTRACTUAL OBLIGATIONS

     The  following  table  summarizes our contractual cash obligations at March
31, 2007, and the effect these obligations are expected to have on liquidity and
cash  flow  in  future  periods:

                                                                   Payments Due By Period
                                             -------------------------------------------------------------------------
                                    Note #     Total      Less than 1 year   1 - 3 years   4 - 5 years   after 5 years
                                    -------  ---------   -----------------  ------------  ------------  --------------
Purchase obligations                    (1)  $   91,000  $          72,800  $     18,200  $          -  $            -
Long-term debt obligations              (2)     753,811            112,031       320,202       135,090         186,488
Operating leases                        (3)     265,636             92,411       173,225             -               -
Capital lease obligations                             -                  -             -             -               -
Other long-term debt obligations                      -                  -             -             -               -
                                             ----------  -----------------  ------------  ------------  --------------

Total contractual cash obligations           $1,110,447  $         277,242  $    511,627  $    135,090  $      186,488
                                             ==========  =================  ============  ============  ==============

(1)  Purchase obligations include agreements to purchase services that are enforceable and legally
binding on the Company and that specify all significant terms and the approximate timing of the
transaction.  Purchase obligations exclude agreements that are cancelable without penalty.

(2)  Amounts represent the expected cash payments of our long-term obligations.

(3)  Amounts represent the expected cash payments of our operating lease obligations.

About NVIC

N-Viro International Corporation develops and licenses its technology to municipalities and private companies. N-Viro's patented processes use lime and/or mineral-rich, combustion byproducts to treat, pasteurize, immobilize and convert wastewater sludge and other bio-organic wastes into biomineral agricultural and soil-enrichment products withreal market value. More information about N-Viro International can be obtained by contacting the office or on the Internet at www.nviro.com or by e-mail inquiry to info@nviro.com

Forward-Looking Statements

The Company cautions that words used in this document such as " expects," "anticipates," "believes" and "may," as well as similar words and expressions used herein, identify and refer to statements describing events that may or may not occur in the future. These forward-looking statements and the matters to which they refer are subject to considerable uncertainty that may cause actual results to be materially different from those described herein. For example, while the Company believes that trends in sludge treatment are moving in favor of the Company's technology, such trends may not continue or may never result in increased sales or profits to the Company because of the availability of competing processes. Additional information about these and other factors that may adversely affect these forward-looking statements are contained in the Company's reports, including its Annual Report on Form 10- KSB, and other filings with the Securities and Exchange Commission. The Company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws.

For More Information Contact:

Timothy Kasmoch, CEO

info@nviro.com (419) 535-6374