**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D. C. 20549**




**FORM
        10-K/A**




**For
      Annual Reports Pursuant to Section 13 or 15(d)**


**of
      the Securities Exchange Act of 1934**




**For
      the Fiscal Year Ended February 28, 2007**




**Commission
      File Number 0-12490**




**ACR
      GROUP, INC.**


**(Exact
      name of registrant as specified in its Charter)**




**Texas**
            **74-2008473****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            **(I.R.S.
                Employer**
              **Identification
                No.)**




**3200
                Wilcrest Drive, Suite 440, Houston, Texas**
            **77042****(Address
                of principal executive offices)**
            **(Zip
                Code)**




**Registrant’s
      telephone number, including area code: (713) 780-8532**


**Title
                  of Each Class**
              **Name
                  of Each Exchange on which Registered****Common
                  Stock, par value $.01 per share**
              **American
                  Stock Exchange**




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




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




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




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




Indicate
      by check mark if there is no disclosure of delinquent filers in response to
      Item 405 of Regulation S-K contained in this form, and no disclosure
      will be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this
      Form 10-K or any amendment to this
      Form 10-K. x




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




Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated
      filer x




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




The
      aggregate market value of the voting stock (common stock) held by non-affiliates
      of the registrant as of August 31, 2006, the last business day of the
      registrant’s most recently completed second quarter was $50,425,151 based on the
      closing sale price on that date. For purposes of determining this number all
      executive officers and directors of the registrant as of August 31, 2006
      are considered to be affiliates of the registrant. This number is provided
      only
      for purposes of the report on Form 10-K and does not represent an admission
      by
      either the registrant or any such person as to the status of such person.




The
        number of shares outstanding of the registrant’s common stock as of
        April 30, 2007: 12,063,765 shares.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




The
      registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders
      to be held in August 2007 is incorporated by reference in answer to Part III
      of
      this report.







-2-


**TABLE
        OF CONTENTS**
  **Page****PART I**Item 1.
              Business
              4Item 1A.
              Risk
                  Factors
              7Item 1B.
              Unresolved
                  Staff Comments
              9Item 2.
              Properties
              9Item 3.
              Legal
                  Proceedings
              9Item 4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              9**PART II**Item 5.
              Market
                  for Registrant’s Common Equity and Related Stockholder
                  Matters
              9Item 6.
              Selected
                  Financial Data
              12Item 7.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              13Item 7A.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              19Item 8.
              Financial
                  Statements and Supplementary Data
              20Item 9.
              Changes
                  in and Disagreements with Accountants on Accounting and
                  Financial Disclosure
              38Item 9A.
              Controls
                  and Procedures
              38**PART III**Item 10.
              Directors
                  and Executive Officers of the
                  Registrant
              38Item 11.
              Executive
                  Compensation
              38Item 12.
              Security
                  Ownership of Certain Beneficial Owners and Management
                  and Related Stockholder Matters
              38Item 13.
              Certain
                  Relationships and Related
                  Transactions
              38Item 14.
              Principal
                  Accountant Fees and Services
              38**PART IV**Item 15.
              Exhibits
                  and Financial Statement Schedules
              38


-3-


**EXPLANATORY
          NOTE**
  This
            Amendment No. 1 on Form 10-K/A (“Amendment No.1”) hereby amends our Annual
            Report on Form 10-K for the fiscal year ended February 28, 2007, which
            ACR
            Group, Inc. (the “Company”) previously filed with the Securities and Exchange
            Commission on May 29, 2007 (“Original Filing”). We are filing this Amendment No.
            1 to correct (a) the format of certain tables in order to present the
            information in such tables in a more easily readable manner, and (b)
            the number
            of shares of the Company’s common stock outstanding as of April 30, 2007, as
            disclosed on the cover page. Except as described above, no other portion
            of the
            Original Filing is being amended or supplemented. The Original Filing
            continues
            to speak as of the date of the Original Filing, and we have not updated
            the
            disclosure contained therein to reflect any events which occurred at
            a date
            subsequent to the date of the Original Filing.


**PART
      I**




**Item 1.** ***Business*** **.**




***General***




ACR
      Group, Inc. (which, together with its subsidiaries is herein referred to as
      the
“Company”, we, us or our) is a Texas corporation based in Houston. In 1990, the
      Company began to acquire and operate businesses engaged in the wholesale
      distribution of heating, ventilating, air conditioning and refrigeration
      (“HVAC”) equipment and supplies. The Company acquired its first operating
      company in 1990. Since 1990, we have grown through acquisitions and organic
      start-ups to 54 branch operations located in predominantly Sunbelt states.
      We
      are now among the largest independently owned HVAC distribution companies in
      the
      United States. All of our operations are in the same line of business. The
      Company plans to continue expanding in the Sunbelt of the United States and
      in
      other geographic areas with a high rate of economic growth, through both
      acquisitions and internal growth.




***The
      HVAC Distribution Industry***




Our
      description of the HVAC industry relates mainly to central air-conditioning
      and
      heating systems that are used in residential and light commercial applications.
      Large commercial buildings usually have specialized climate control requirements
      that are met directly by manufacturers without the involvement of distributors.
      However, distributors acting as an intermediary between manufacturers and the
      contractors or end users that install or service the HVAC systems generally
      serve the residential and light commercial HVAC markets in the United States.
      There are over 1,000 wholesale distributors of HVAC products in the United
      States. It is a fragmented industry, with the largest distributor having
      approximately a 7% share of a market estimated at between $25 and $30 billion.




There
      are
      many manufacturers of products used in the HVAC industry, and no single
      manufacturer dominates the market for a range of products. The manufacturers
      of
      central HVAC equipment sell their products under multiple brand names and
      generally limit the number and territory of wholesalers that may distribute
      their brands, but exclusivity is rare. Many manufacturers of HVAC parts and
      supplies will generally permit any distributor who satisfies customary
      commercial credit standards to sell their products. In addition, there are
      some
      manufacturers, primarily of equipment, that distribute their own products
      through factory branches. The widespread availability of HVAC products to
      distributors results in significant competition. The industry traditionally
      has
      been characterized by closely-held businesses with operations limited to local
      or regional geographic areas; however, there is a gradual process of
      consolidation in the HVAC distribution industry, as many of these companies
      reach maturity and face strategic business issues such as ownership succession,
      changing markets and lack of capital to finance growth.




The
      commercial and residential segments of the HVAC industry are further divided
      into two markets—new construction sales and replacement and/or repair sales.
      Some distributors choose to specialize in serving the new construction markets
      while others focus on the repair/replacement market, commonly referred to as
      the
“aftermarket.” Although homebuilding represents an important component of HVAC
      distribution sales, the aftermarket is generally estimated to comprise
      approximately a 70% share of industry revenues. The aftermarket increases in
      size continuously, as new residential installations add to the installed base
      of
      HVAC systems. The mechanical life of central HVAC equipment varies significantly
      by geographic area due to usage and extent of maintenance. Many consumers
      replace HVAC units before the end of their useful life because of the
      availability of more energy efficient models and a desire to ensure operating
      reliability of their HVAC system.




***Our
      Position in the HVAC Industry***




We
      are
      among the largest independent distributors in the HVAC industry. We are one
      of
      only three independent HVAC distributors whose stock is publicly traded, so
      it
      is difficult to easily obtain reliable financial information about our
      competitors. Some of the HVAC equipment manufacturers own all or a portion
      of
      their distribution networks but they do not disclose separate financial
      information about their distribution operations. Trade associations for the
      HVAC
      and related distribution industries publish rankings based on information
      voluntarily supplied by their members and estimates derived by researchers.
      Such
      rankings place us among the top fifteen HVAC distributors in the U.S.




***Our
      Growth Strategy***




Since
      entering the industry with our first acquisition in 1990, we have focused on
      building the Company through both acquisitions and organic growth. We have
      concentrated on business development in the Sunbelt states because of the need
      for air conditioning in that area of the country and because of the higher
      rate
      of population growth in southern and western states than in other areas of
      the
      country. Although we have made ten acquisitions, we do not consider ourselves
      to
      be a “consolidator”.


-4-




Rather,
      we have frequently engaged in a “buy and build” strategy, where we have acquired
      a small company to gain a presence in a certain market and subsequently built
      the company through organic growth. We encourage management of our business
      units to continually seek opportunities to open additional branch operations.
      Our experience is that most new branches will generate above average revenue
      growth during their first five years, so we try to maintain a pipeline of
      planned new branches to help sustain a growth rate higher than average for
      our
      industry. Our decentralized business philosophy is also attractive to many
      experienced managers in our industry, and we have successfully attracted many
      of
      our key personnel from competitors.




At
      the
      end of April 2007, our operations were in Texas (16 branches), Florida (11
      branches), California (9 branches), Georgia (6 branches), Colorado (4 branches),
      Arizona (3 branches), New Mexico (2 branches), and one branch in Louisiana,
      Nevada, and Tennessee. We do not have a dedicated business development staff;
      instead, we rely on our reputation in the industry and on referrals from our
      industry relationships to alert us to business opportunities. As our industry
      is
      comprised mainly of family-owned businesses, our goal is to attract the present
      owners and management of such businesses by offering certain advantages related
      to economies of scale, lower cost of products from volume purchasing, new
      product lines, and financial, administrative and technical support.




***Our
      Operating Philosophy***




We
      support a decentralized operating culture where branch managers are responsible
      for all decisions that affect customer service. Each of our business units
      has
      an administrative office that is responsible for coordinating branch activities
      and performing accounting and clerical functions. Branch managers are
      responsible, within limitations, for all the operations of their stores,
      including ordering inventory, order fulfillment and customer pricing. Branch
      managers have the capability and responsibility to take care of their customers’
needs. Branch managers receive monthly operating income statements and have
      significant financial incentives to develop and manage profitable operations.




Our
      organizational structure is relatively flat. Branch employees, including outside
      salespersons, generally report to the branch manager. The branch managers and
      the administrative office personnel report to the business unit president.
      Business unit presidents report to the corporate office. We do not have a
      mid-level management structure, although we occasionally employ product
      specialists for our HVAC equipment brands.




We
      currently have eleven employees in our corporate office who perform the duties
      associated with publicly traded companies and provide functional support to
      our
      business units. These duties include investor relations, external financial
      reporting, treasury management, risk management, information technology support,
      human resources and payroll.




All
      of
      our operations use the same enterprise resource planning (ERP) software and
      central computer system. We believe this feature is essential to enable us
      to
      obtain consistent financial information, maintain an appropriate control
      structure and regularly monitor our operations with a relatively small corporate
      office staff.




***Our
      Business Model***




Our
      branch operations are organized into business units that are generally assembled
      by geographic proximity. A president manages the operations of each business
      unit. We presently have five business units, which have from seven to sixteen
      branches. With 54 branches for most of fiscal 2007, our revenues average over
      $4
      million per branch, which is significantly in excess of the average for our
      industry. We believe that large branches are more easily successful within
      our
      decentralized operating structure. Although we have smaller branches that are
      profitable, we do not open new branches unless we believe they have the
      potential to generate annual sales of at least $3 million at maturity.




In
      all
      respects other than their geographic locations, our business units are
      sufficiently similar that we consider them to be a single business segment
      for
      financial reporting purposes. This determination is based on a review of the
      aggregation criteria set out in Statement of Financial Accounting Standards
      (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related
      Information, including:


•
              nature
                  of products and services•
              customer
                  markets served•
              methods
                  used to acquire and distribute products•
              economic
                  characteristics that influence the results of operations in different
                  geographical areas




-5-




***Description
      of our Business***




We
      are a
      key link in the HVAC industry supply chain between manufacturers and contractors
      and other technically trained end-users. We do not manufacture any products
      and
      we do not perform any service on HVAC systems. To sustain our position in the
      supply chain, we focus on providing value to both our suppliers and our
      customers. For our suppliers, we maintain a stocking inventory of their products
      in our physical locations, market their products to local contractors and users
      through an outside sales force, handle product returns and process warranties.
      For our customers, we try to be a “one-stop shop” where they can obtain all the
      products needed for their work. All of our stores have a sales counter where
      customers can purchase products. We also provide trade credit to our customers,
      deliver to their places of business or job sites and offer technical training
      and advice.




Our
      principal customers are the dealers and contractors who install and service
      residential and light commercial HVAC systems. We also sell to commercial and
      institutional end-users that employ HVAC service technicians. We estimate that
      approximately 80% of our business is for residential applications. Although
      some
      HVAC distributors also sell products used by contractors who install and service
      commercial refrigeration equipment, that industry segment represents an
      insignificant percentage of our business.




Our
      customers include both those whose principal business is to install HVAC systems
      in new construction and those who principally repair, service and replace
      systems already installed. We have no way to precisely measure the sales volume
      to each of these industry segments, but we believe that our sales mix
      approximates that of the entire industry, which is estimated to be 30% for
      new
      construction and 70% for the service and replacement aftermarket.




Maintenance
      of a large and diverse inventory base is an important element in our sales.
      We
      regularly purchase inventory from over 400 suppliers. Approximately 34% of
      our
      revenues are from sales of HVAC equipment; the remaining 66% of our sales is
      from installation supplies and service parts. Our principal suppliers of HVAC
      equipment are International Comfort Products (ICP), a subsidiary of Carrier
      Corporation, and Haier USA (Haier), which imports consumer products manufactured
      in China. All of our business units sell equipment brands manufactured by ICP
      and Haier. Prior to fiscal 2006, two of the Company’s business units primarily
      sold equipment supplied by Goodman Manufacturing (Goodman)





***Executive
      Officers of the Registrant***




The
      Company’s executive officers are as follows:




Name
            Age
            Position
                with the CompanyAlex
                Trevino, Jr.
            70
            Chairman
                of the Board and PresidentAnthony
                R. Maresca
            56
            Senior
                Vice President, Treasurer and Chief Financial OfficerA.
                Stephen Trevino
            44
            Senior
                Vice President, Secretary and General
                Counsel




Alex
      Trevino, Jr. has served as Chairman of the Board since 1988 and as President
      and
      Chief Executive Officer of the Company since July 1990.




Anthony
      R. Maresca has been employed by the Company since 1985. In November 1985 he
      was
      elected Senior Vice President, Chief Financial Officer and Treasurer.
      Mr. Maresca is a certified public accountant.




A.
      Stephen Trevino has been employed by the Company since March 1999, initially
      serving as General Counsel and directing various administrative functions.
      He
      was elected Senior Vice President and Secretary in August 2000. In August 2005,
      he was also appointed president of one of the Company’s business units.




***Employees***




As
      of
      February 28, 2007, the Company and its subsidiaries had approximately 483
      full-time employees. Neither the Company nor its subsidiaries routinely use
      temporary labor. There are no Company employees represented by any collective
      bargaining units. Management considers the Company’s relations with its
      employees to be good.


-6-




***Government
      Regulations, Environmental and Health and Safety
      Matters***




The
      HVAC
      industry and the Company are subject to federal, state and local laws and
      regulations relating to the generation, storage, handling, emission,
      transportation and discharge of materials into the environment. These include
      laws and regulations implementing the Clean Air Act, relating to minimum energy
      efficiency standards of HVAC systems and the production, servicing and disposal
      of certain ozone-depleting refrigerants used in such systems, including those
      established at the Montreal Protocol in 1992 concerning the phase-out of
      CFC-based refrigerants. The Company’s operations are also subject to health and
      safety requirements including the Occupational, Safety and Health Act (OSHA).
      The Company is also subject to regulations concerning the transport of hazardous
      materials, including regulations adopted pursuant to the Motor Carrier Safety
      Act of 1990. The Company believes that its business is operated in substantial
      compliance with all applicable federal, state and local provisions relating
      to
      the protection of the environment, transport of hazardous materials and health
      and safety requirements.




The
      HVAC
      industry and the Company were also subject to a Department of Energy mandate
      that required, effective January 23, 2006, that HVAC equipment suppliers
      manufacture products with a higher standard of energy efficiency. Prior to
      January 23, 2006, the minimum standard for energy efficiency as measured by
      industry guidelines was 10 SEER (seasonal energy efficiency rating, the value
      used to measure energy efficiency). On the effective date, the new standard
      increased the minimum allowed efficiency to 13 SEER. The transition of products
      to 13 SEER took place during 2006. The new standard does not prohibit the sale
      or installation of products below 13 SEER that were manufactured before January
      2006, and there are certain market niches where demand for lower efficiency
      HVAC
      equipment will continue so long as there is product availability.




***Website
      Access to Company Reports***





The
      Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
      reports on Form 8-K and all amendments to those reports are available free
      of
      charge on the Company’s website at www.acrgroup.com as soon as reasonably
      practical after such material is electronically filed with or furnished to
      the
      Securities and Exchange Commission.




Also,
      copies of the Company’s annual report will be made available free of charge upon
      written request.




**Item 1A.** ***Risk
      Factors*** **.**




**Business
      Risk Factors**




***Supplier
      Concentration***




The
      Company maintains distribution agreements with its key equipment suppliers.
      Some
      of the distribution agreements contain provisions that restrict or limit the
      sale of competitive products in the markets served. Other than the markets
      where
      such restrictions and limitations may apply, we may distribute other
      manufacturers’ lines of air conditioning or heating equipment. Purchases from a
      key supplier comprised 33% of all purchases made in fiscal 2007. Any significant
      interruption by this manufacturer or a termination of a distribution agreement
      could disrupt the operations of our business units. Future results of operations
      are also materially dependent upon the continued market acceptance of
      manufacturers’ products and their ability to continue to manufacture products
      that comply with laws relating to environmental and efficiency standards.




***Seasonality***




Much
      of
      the HVAC industry is seasonal; sales of HVAC equipment and service are generally
      highest during the times of the year when climatic conditions require the
      greatest use of such systems. Because of our geographic concentration in the
      Sunbelt, our sales of air conditioning products are substantially greater than
      of heating products. Likewise, our sales volume is highest in the summer months
      when air conditioning use is greatest. Accordingly, our revenues are higher
      in
      our second fiscal quarter ending August 31, and our revenues are lower in
      our fourth quarter ending the last day of February. Sales of refrigeration
      equipment, parts, and supplies which are generally to commercial customers,
      are
      subject to less seasonality.


-7-




***New
      Construction Cyclicality***




Unlike
      the replacement aftermarket, which is seasonal based on weather conditions,
      the
      unit sales volume of the new construction segment of the HVAC industry varies
      based on the economic factors that impact residential and commercial new
      construction. These factors are historically cyclical and include macroeconomic
      conditions such as interest rate environment, level of investment activity
      in
      real estate compared to alternative investment opportunities, consumer sentiment
      and availability of mortgage financing. Although we estimate that only about
      30%
      of the Company’s sales are related to new construction, if there is a
      significant reduction in new construction activity for a period of time, the
      Company’s sales and income could be materially affected.




***Competition***




We
      operate in highly competitive environments. We compete with a number of
      independent distributors and also with several air conditioning and heating
      equipment manufacturers that distribute a significant portion of their products
      through their own distribution organizations in certain markets. Competition
      within any given geographic market is based upon product availability, customer
      service, price and quality. Competitive pressures or other factors could cause
      our products or services to lose market acceptance or result in significant
      price erosion, either of which would have a material adverse effect on
      profitability.




**General
      Risk Factors**




***Risks
      Related to Insurance Coverage***




We
      carry
      general liability, comprehensive property damage, workers’ compensation and
      other insurance coverage that management considers adequate for the protection
      of the Company’s assets and operations. There can be no assurance, however, that
      the coverage limits of such policies will be adequate to cover losses and
      expenses for lawsuits brought or which may be brought against us.




A
      loss in
      excess of insurance coverage could have a material adverse effect on our
      financial position and/or profitability. Self-insurance risks related to
      employee medical benefits and casualty insurance programs are retained by the
      Company. Reserves are established based on claims filed and estimates of claims
      incurred but not yet reported. Assurance cannot be provided that actual claims
      will not exceed present estimates. We limit exposure to catastrophic losses
      by
      maintaining excess and aggregate liability coverage and implementing loss
      control programs.




***Information
      about Forward-Looking Statements***




This
      Form
      10-K contains or incorporates by reference statements that are not historical
      in
      nature and that are intended to be, and are hereby identified as,
“forward-looking statements” as defined in the Private Securities Litigation
      Reform Act of 1995, including statements regarding, among other items,
      (i) business and acquisition strategies, (ii) potential acquisitions,
      (iii) financing plans and (iv) industry, demographic and other trends
      affecting the Company’s financial condition or results of operations. These
      forward-looking statements are based largely on management’s expectations and
      are subject to a number of risks and uncertainties, certain of which are beyond
      their control.




Actual
      results could differ materially from these forward-looking statements as a
      result of several factors, including:




•
              general
                  economic conditions affecting general business spending,•
              consumer
                  spending,•
              consumer
                  debt levels,•
              prevailing
                  interest rates,•
              seasonal
                  nature of product sales,•
              changing
                  rates of new housing starts,•
              weather
                  conditions,•
              effects
                  of supplier concentration,•
              competitive
                  factors within the HVAC industry,•
              insurance
                  coverage risks,•
              viability
                  of the Company’s business strategy.




-8-




In
      light
      of these uncertainties, there can be no assurance that the forward-looking
      information contained herein will be realized or, even if substantially
      realized, that the information will have the expected consequences to or effects
      on the Company or its business or operations. A discussion of certain of these
      risks and uncertainties that could cause actual results to differ materially
      from those predicted in such forward-looking statements is included in
      Item 7 “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations”. Forward-looking statements speak only as of the date the
      statement was made. The Company assumes no obligation to update forward-looking
      information or the discussion of such risks and uncertainties to reflect actual
      results, changes in assumptions or changes in other factors affecting
      forward-looking information.




**Item 1B.** ***Unresolved
      Staff Comments.*** ****




None.




**Item 2.** ***Properties.*** ****




The
      Company and its subsidiaries occupy office and warehouse space under operating
      leases with various terms ranging generally from five to ten years. Many of
      the
      leases contain extension options. At February 28, 2007 the Company operated
      54 branch locations in 10 states and one distribution center and its corporate
      headquarters in Houston, Texas. Generally, a branch location will contain 15,000
      to 30,000 square feet of showroom and warehouse space. Branch locations that
      include a subsidiary’s corporate office are sometimes larger. The Company owns
      its branch facilities in Pasadena, TX and Gainesville, FL, and a building and
      land that are leased to the company that purchased the Company’s filter
      manufacturing operations in 2004. All of the owned properties are subject to
      mortgage liens. For further details see Note 4 to the Company’s financial
      statements.




**Item 3.** ***Legal
      Proceedings.*** ****




We
      are
      subject to various legal proceedings arising in the ordinary course of business.
      We vigorously defend all matters in which the Company or its business units
      are
      named defendants and, for insurable losses, maintain insurance to protect
      against adverse judgments, claims or assessments. Although the adequacy of
      existing insurance coverage or the outcome of any legal proceedings cannot
      be
      predicted with certainty, we do not believe the ultimate liability associated
      with any claims or litigation will have a material impact to our financial
      condition or results of operations.




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




No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year ended February 28, 2007.






**PART
      II**




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




On
      March 20, 2006, the Company’s common stock began trading on the American
      Stock Exchange ® under
      the symbol “BRR”. Prior to that date, the stock was traded in the
      over-the-counter market under the symbols “ACRG”, “ACRG.OB” or “ACRG.BB”,
      depending on the source of the quote.




As
      of
      April 30, 2007, there were 393 holders of record of the Company’s common
      stock. This number does not include the beneficial owners of shares held in
      the
      name of a broker or nominee.




During
      fiscal 2007, 2006 and 2005 the Company issued 135,000, 50,000 and 1,084,000
      shares, respectively, of unregistered restricted stock of which 386,582 shares
      were vested at February 28, 2007.




The
      Company has never declared or paid cash dividends on its common stock. The
      Company’s loan agreement with its senior lender expressly prohibits the payment
      of dividends by the Company. See Management’s Discussion and Analysis of
      Financial Condition and Results of Operations—Liquidity and Capital Resources,
      and Note 4 of Notes to Consolidated Financial Statements.


-9-




The
      table
      below sets forth the high and low sales prices based upon actual transactions.




High
            
            LowFiscal
                Year 20071st
                quarter ended 5/31/06
            
            $
            4.15
            
            $
            3.452nd
                quarter ended 8/31/06
            
            
            5.93
            
            
            3.953rdquarter ended 11/30/06
            
            
            6.47
            
            
            4.804th
                quarter ended 2/28/07
            
            
            5.97
            
            
            4.60Fiscal
                Year 2006:1stquarter ended 5/31/05
            
            $
            4.19
            
            $
            2.672nd
                quarter ended 8/31/05
            
            
            3.19
            
            
            2.333rd
                quarter ended 11/30/05
            
            
            2.95
            
            
            2.224th
                quarter ended 2/28/06
            
            
            3.74
            
            
            2.78


-10-




**Stock
      Performance Graph**




The
      following graph compares the cumulative 5-year total return to shareholders
      on
      the Company’s common stock relative to the cumulative total returns of the AMEX
      Composite index, the NASDAQ Non-Financial index and the DJ Wilshire Building
      Materials & Fixtures index. An investment of $100 (with reinvestment of all
      dividends) is assumed to have been made in the company's common stock and in
      each of the indexes on 2/28/2002 and its relative performance is tracked through
      2/28/2007. We have chosen the DJ Wilshire Building Materials & Fixtures
      index to replace the NASDAQ Non-Financial index as the comparative
      line-of-business index because we believe it more accurately represents the
      Company’s industry.









**2/02**
            
            **2/03**
            
            **2/04**
            
            **2/05**
            
            **2/06**
            
            **2/07****ACR
                Group, Inc.**
            
            
            **100.00**
            
            
            **82.39**
            
            
            **315.22**
            
            
            **810.87**
            
            
            **760.87**
            
            
            **1002.80****AMEX
                Composite**
            
            
            **100.00**
            
            
            **85.22**
            
            
            **126.83**
            
            
            **142.87**
            
            
            **161.06**
            
            
            **172.91****NASDAQ
                Non-Financial**
            
            
            **100.00**
            
            
            **76.85**
            
            
            **114.32**
            
            
            **115.69**
            
            
            **127.13**
            
            
            **133.89****DJ
                Wilshire Building Materials & Fixtures**
            
            
            **100.00**
            
            
            **77.68**
            
            
            **131.32**
            
            
            **167.56**
            
            
            **198.35**
            
            
            **221.31**






**2/02**
            
            **2/03**
            
            **2/04**
            
            **2/05**
            
            **2/06**
            
            **2/07****ACR
                Group, Inc.**
            
            
            
            
            
            **-17.61**
            **%**
            
            **282.59**
            **%**
            
            **157.24**
            **%**
            
            **-6.17**
            **%**
            
            **31.80**
            **%****AMEX
                Composite**
            
            
            
            
            
            **-14.78**
            **%**
            
            **48.82**
            **%**
            
            **12.65**
            **%**
            
            **12.73**
            **%**
            
            **7.35**
            **%****NASDAQ
                Non-Financial**
            
            
            
            
            
            **-23.15**
            **%**
            
            **48.75**
            **%**
            
            **1.20**
            **%**
            
            **9.89**
            **%**
            
            **5.31**
            **%****DJ
                Wilshire Building Materials & Fixtures**
            
            
            
            
            
            **-22.32**
            **%**
            
            **69.04**
            **%**
            
            **27.60**
            **%**
            
            **18.37**
            **%**
            
            **11.58**
            **%**


-11-




**Item 6.
      Selected Financial Data.**





The
      following selected financial data of the Company have been derived from the
      audited consolidated financial statements. This summary should be read in
      conjunction with the audited consolidated financial statements and related
      notes
      included in Item 8 of this Report. Since February 28, 2003, the
      increase in sales has resulted principally from internal expansion. The Company
      has never paid any dividends.




The
      Company’s income tax provision in fiscal year 2003 was reduced primarily by the
      benefit of a previously unrecognized net operating loss carryforward.




The
      cumulative effect of accounting change in fiscal 2003 was attributable to the
      adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”.




**Selected
      Financial Data**


**(in
      thousands, except per share data)**





**Year
                Ended February 28 or 29,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****Income
                Statement Data:**Sales
            
            $
            239,643
            
            $
            204,312
            
            $
            199,553
            
            $
            174,353
            
            $
            161,822Gross
                profit
            
            
            61,036
            
            
            48,331
            
            
            46,645
            
            
            38,558
            
            
            35,673Operating
                income
            
            
            10,994
            
            
            5,134
            
            
            7,330
            
            
            4,452
            
            
            2,690Income
                before income taxes
            
            
            9,286
            
            
            4,558
            
            
            6,799
            
            
            3,759
            
            
            1,277Provision
                for income taxes
            
            
            (3,544
            )
            
            (1,804
            )
            
            (2,588
            )
            
            (1,364
            )
            
            (277
            )Cumulative
                effect of accounting change
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (483
            )Net
                income
            
            $
            5,742
            
            $
            2,754
            
            $
            4,211
            
            $
            2,395
            
            $
            517Earnings
                (loss) per common share:Basic:Before
                cumulative effect of accounting change
            
            $
            .51
            
            $
            .25
            
            $
            .39
            
            $
            .22
            
            $
            .09Cumulative
                effect of accounting change
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (.04
            )$
            .51
            
            $
            .25
            
            $
            .39
            
            $
            .22
            
            $
            .05Diluted:Before
                cumulative effect of accounting change
            
            $
            .49
            
            $
            .24
            
            $
            .38
            
            $
            .22
            
            $
            .09Cumulative
                effect of accounting change
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (.04
            )$
            .49
            
            $
            .24
            
            $
            .38
            
            $
            .22
            
            $
            .05






**As
                of February 28 or 29**,**2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003****Balance
                Sheet Data:**Working
                capital
            
            $
            41,692
            
            $
            34,489
            
            $
            35,375
            
            $
            25,881
            
            $
            22,605Total
                assets
            
            
            83,160
            
            
            76,036
            
            
            67,704
            
            
            58,727
            
            
            52,728Long-term
                obligations
            
            
            26,314
            
            
            24,872
            
            
            27,881
            
            
            23,258
            
            
            22,855Shareholders’
                equity
            
            
            27,286
            
            
            21,146
            
            
            17,704
            
            
            13,058
            
            
            10,663




-12-




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




***Results
      of Operations***




The
      following table presents information derived from the consolidated statements
      of
      income expressed as a percentage of revenues for the years ended February 28,
      2007, 2006 and 2005.




**Fiscal
                Year Ended****February
                28,****2007**
            
            **2006**
            
            **2005**Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            74.5
            
            
            76.3
            
            
            76.6Gross
                profit
            
            
            25.5
            
            
            23.7
            
            
            23.4Selling,
                general and administrative expenses
            
            
            20.9
            
            
            21.1
            
            
            19.7Operating
                income
            
            
            4.6
            
            
            2.6
            
            
            3.7Interest
                expense
            
            
            1.0
            
            
            0.7
            
            
            0.5Interest
                derivative loss (gain)
            
            
            -
            
            
            (0.1
            )
            
            0.1Other
                non-operating income
            
            
            (0.3
            )
            
            (0.3
            )
            
            (0.3
            )Income
                before income taxes
            
            
            3.9
            
            
            2.3
            
            
            3.4Income
                taxes
            
            
            1.5
            
            
            0.9
            
            
            1.3Net
                income
            
            
            2.4
            %
            
            1.4
            %
            
            2.1
            %




Disclosures
      below that refer to “same-store” comparisons exclude branch operations that were
      opened or closed after the beginning of fiscal 2006. We opened five branches
      in
      fiscal 2007 and two branches after the beginning of fiscal 2006. In addition,
      we
      acquired two branch operations effective as of the beginning of fiscal 2006.
      There were no branches closed in either fiscal year.





**Comparison
      of Fiscal Year Ended February 28, 2007 to Fiscal Year Ended February 28,
      2006**




Net
      income increased 109% in fiscal 2007 compared to fiscal 2006, as operating
      results improved at each of our five business units. The largest gains in
      operating income occurred at our business units in the southeastern U.S., as
      our
      business unit based in Florida continued a string of consecutive years in which
      its profitability has grown significantly. Our business unit based in Georgia
      recovered from fiscal 2006, when it had an operating loss that resulted largely
      from transitioning the primary line of HVAC equipment that it
      sells.




We
      generally expect that new branch operations may be unprofitable for the first
      12
      to 18 months of operations although, historically, some new branch operations
      have become profitable in less than 12 months, and in other cases, branches
      have
      incurred losses for longer than 18 months from inception. Aggregate operating
      losses of branches opened or acquired in fiscal 2007 and 2006 were $430,000
      and
      $190,000, respectively, thereby reducing earnings per share in fiscal 2007
      by
      $0.02 and in fiscal 2006 by $0.01.




Consolidated
      sales increased 17% in fiscal 2007 compared to fiscal 2006, and same-store
      sales
      increased 13% from fiscal 2006 to 2007. The increase in same-store sales
      resulted from strong demand for our products, especially during the first two
      quarters of fiscal 2007, a transition to higher efficiency air conditioning
      equipment that sells for higher prices, and increases in the costs of
      commodity-based products such as copper and steel that resulted in higher unit
      sale prices. All of the increase in sales from fiscal 2006 to fiscal 2007 was
      organic; the Company made no acquisitions in fiscal 2007.


-13-




Our
      gross
      margin on sales increased to 25.5% in fiscal 2007 from 23.7% in fiscal 2006.
      All
      of the increase was attributable to point-of-sale pricing. Higher selling
      margins in fiscal 2007 reflected our ability to sell higher efficiency HVAC
      equipment, which was mandated by the federal government, at higher margins
      in
      fiscal 2007 than we obtained on less efficient equipment in fiscal 2006. In
      addition, we were able to command higher margins in fiscal 2007 on our remaining
      inventory of lower efficiency equipment because of the finite supply that
      resulted after production of such products was phased out late in fiscal 2006.




Selling,
      general and administrative (“SG&A”) expenses expressed as a percentage of
      sales declined to 20.9% in fiscal 2007 from 21.1% in fiscal 2006. Same-store
      SG&A expenses increased 11% in fiscal 2007 compared to fiscal 2006,
      principally because of variable expenses associated with higher levels of sales,
      gross profit and operating income in fiscal 2007. Excluding commissions and
      other incentive compensation, same-store SG&A expenses increased 5% from
      fiscal 2006 to 2007. Total payroll costs were 58% and 57% of SG&A expenses
      in fiscal 2007 and 2006, respectively. Variable compensation increased from
      12%
      of SG&A expenses in fiscal 2006 to 15% of SG&A expenses in fiscal
      2007.




Interest
      expense increased 65% in fiscal 2007, compared to fiscal 2006, reflecting both
      higher average interest rates on our variable rate debt and a higher average
      level of outstanding borrowings in fiscal 2007. Average outstanding funded
      debt
      was $35.0 million in fiscal 2007, compared to $27.2 million in fiscal 2006,
      as
      we used our line of credit to support working capital requirements associated
      with the higher volume of sales in fiscal 2007 and our investment in new branch
      operations. As a percentage of sales, interest expense was 1.0% in fiscal 2007
      and 0.7% in fiscal 2006.




Until
      October 2006, our interest rate swap agreements did not qualify for hedge
      accounting and were accounted for as investments. So long as the swap agreements
      were accounted for as investments, changes in the market value of the agreements
      were reflected as interest derivative gain or loss in our statements of income.
      In fiscal 2007 and 2006, the swap agreements generated gains of $84,000 and
      $247,000, respectively, based on both monthly payments received for the
      difference between the fixed rate stated in the swap agreements and the market
      rate and changes in the market value of the instruments. Other non-operating
      income, which consists principally of finance charges collected from customers,
      declined 1% in fiscal 2007 from fiscal 2006.




The
      Company’s effective tax rate was 38.2% in fiscal 2007, compared to 39.6% in
      fiscal 2006. The effective tax rate declined primarily due to lower state income
      taxes resulting from a shift of earnings to lower tax states compared to fiscal
      2006.




**Comparison
      of Fiscal Year Ended February 28, 2006 to Fiscal Year Ended February 28,
      2005**




Net
      income declined to $2,754,000 in fiscal 2006 from $4,211,000 in fiscal 2005,
      a
      decline of 35%. The decline in net income from fiscal 2005 to fiscal 2006 was
      a
      result of a reduction in sales at the Company’s business units based in Georgia
      and in Colorado from termination of the rights to distribute the Goodman brand
      of HVAC equipment in February 2005. Although these business units secured
      distribution rights for other brands of comparable equipment, there were initial
      delays in obtaining an appropriate quantity and mix of inventory at each
      affected branch location. Subsequently, these business units experienced
      difficulty through the remainder of the fiscal year converting a significant
      percentage of their customers to the new equipment brands. In fiscal 2005,
      Goodman equipment had represented approximately 60% and 20% of sales by the
      Georgia and Colorado-based business units, respectively. Operating income at
      these two business units declined by $4.2 million in fiscal 2006 compared to
      fiscal 2005. The combined operating income at the Company’s other branch
      operations that were not affected by the Goodman brand transition increased
      $2.1
      million, or 28%, in fiscal 2006 over fiscal 2005, with the Florida-based
      business unit delivering strong growth in both sales and income.




Same-store
      sales decreased 3% in fiscal 2006 compared to fiscal 2005. The fiscal 2006
      comparison was significantly affected by the decline in sales of Goodman brand
      equipment described above. At the branch operations that did not sell Goodman
      brand equipment, same-store sales increased 17% in fiscal 2006 over fiscal
      2005.
      Sales growth in fiscal 2006 was strong throughout the year in both Florida
      and
      Nevada, buoyed by robust regional economies and new housing starts. In Texas,
      favorable economic and weather conditions boosted sales during the last two
      quarters of fiscal 2006. An acquisition in Florida also added $3.2 million
      to
      sales in fiscal 2006.


-14-




The
      Company’s gross margin percentage was 23.7% in fiscal 2006, compared to 23.4% in
      fiscal 2005. The increase in gross margin percentage from fiscal 2005 to fiscal
      2006 resulted entirely from greater purchase volume rebates and payment
      discounts, rather than point-of-sale pricing.




Consolidated
      selling, general and administrative (“SG&A”) expenses increased 10% in
      fiscal 2006 from fiscal 2005. Expressed as a percentage of sales, SG&A
      expenses were 21.1% in fiscal 2006, compared to 19.7% in fiscal 2005. Same-store
      SG&A expenses increased 4% in fiscal 2006 from 2005. At the business units
      that suffered sales declines in fiscal 2006 from the equipment brand transition,
      management did not undertake corresponding cost reduction measures, which would
      have required forced staff reductions, but allowed attrition to reduce SG&A
      expenses below prior year levels. Total payroll costs were 57% and 58% of
      SG&A expenses in fiscal 2006 and 2005, respectively. Variable compensation
      decreased from 14% of SG&A expenses in fiscal 2005 to 12% of SG&A
      expenses in fiscal 2006, as a result of lower operating income in fiscal
      2006.




Interest
      expense increased 41% in fiscal 2006 due principally to short-term interest
      rates that rose continuously during the year. Average funded indebtedness
      increased 8% over fiscal 2005, as the Company used its revolving credit line
      for
      working capital both to access favorable payment terms with suppliers and to
      finance customer receivables and inventories associated with new branch
      operations. In fiscal 2006 and 2005, interest expense was 0.7% and 0.5% of
      sales, respectively. As described above, the Company’s interest rate swap
      agreements were accounted for as investments in fiscal 2006 and 2005. Such
      agreements generated a gain of $247,000 in fiscal 2006 and a loss of $50,000
      in
      fiscal 2005, based on monthly payments made or received for the difference
      between the fixed rate and the market rate and changes in the market value
      of
      the derivatives. Such gains and losses are principally a function of changes
      in
      the expected yield on long-term debt instruments. Other non-operating income,
      which consists principally of finance charges collected from customers,
      increased 15% from fiscal 2005 to 2006.




An
      increase in the Company’s effective tax rate from 38.1% in fiscal 2005 to 39.6%
      in fiscal 2006 occurred primarily due to higher state income taxes in 2006.




***Liquidity
      and Capital Resources***




The
      Company used $0.3 million of cash in operations in fiscal 2007 compared to
      generating $3.7 million cash flow from operations in fiscal 2006. The positive
      cash flow generated in fiscal 2006 resulted principally from extended payment
      terms that the Company negotiated with its largest supplier for inventory
      shipments in the fourth quarter of the fiscal year. In March 2006, the Company
      paid $3.6 million to the supplier pursuant to the extended payment terms.
      Accounts receivable represented 46 days of gross sales at the end of fiscal
      2007, compared to 45 days at the end of fiscal 2006. Inventories increased
      $5.3
      million from February 28, 2006 to February 28, 2007, of which $3.7
      million was at branch operations that we opened in fiscal 2007.




The
      Company made capital expenditures of $1.8 million in fiscal 2007, compared
      to
      $1.5 million in fiscal 2006. A majority of the assets acquired by the Company
      in
      both fiscal years were for leasehold improvements at new and relocated branch
      operations and for warehouse equipment.




Net
      cash
      provided by financing activities was $1.2 million in fiscal 2007, compared
      to
      net cash used in financing activities of $3.2 million in fiscal 2006. The
      Company utilizes a cash management system that applies cash generated from
      operations, as discussed above, to reduce indebtedness under its revolving
      credit line. The additional funds borrowed in fiscal 2007 were for new branch
      openings.




As
      of
      February 28, 2007, the Company has a credit arrangement (“Agreement”) with
      a commercial bank, which includes both a $45 million revolving line of credit
      and a $5 million credit line that may be used for capital expenditures or to
      purchase real estate. The amount that may be borrowed under the revolving credit
      line is limited to a borrowing base consisting of 85% of eligible accounts
      receivable, and from 50% to 65% of eligible inventory, depending on the time
      of
      year. At February 28, 2007, the Company’s available credit under the
      revolver was $11.2 million. The Agreement terminates in August 2008.




As
      of
      February 28, 2007, the Company had outstanding borrowings of $24,361,000 on
      the revolving line of credit and $624,000 under the capital expenditure
      facility. In addition, the Company had an outstanding letter of credit for
      $926,000 against the line of credit. Borrowings under the capital expenditure
      facility are repaid in equal monthly principal installments of $6,593 plus
      interest.


-15-




Borrowings
      under both facilities bear interest based on the prime rate or LIBOR, plus
      a
      spread that is dependent on the Company’s financial performance. As of
      February 28, 2007, the applicable interest rate on both facilities was the
      prime rate, or LIBOR plus 1.375%, and the Company had elected the LIBOR option
      (5.375%) at February 28, 2007 for substantially all amounts outstanding
      under the facilities. A commitment fee of 0.25% is paid on the unused portion
      of
      the revolving credit line.




The
      Agreement contains customary loan covenants with respect to the Company’s net
      worth, fixed charge coverage, leverage ratio, and ratio of funded debt to
      earnings before interest, income tax, depreciation, amortization and non-cash
      compensation expense. The Agreement also contains various affirmative and
      negative covenants unrelated to the Company’s financial performance, including a
      prohibition on payment of dividends. Failure to comply with any financial or
      non-financial covenant, if not promptly cured, constitutes an Event of Default
      under the Agreement. Certain other specified events and any Material Adverse
      Change, as determined by the bank, also constitute an Event of Default. The
      existence of an Event of Default gives the bank a right to accelerate all
      outstanding indebtedness under the Agreement. As of February 28, 2007, the
      Company was in compliance with all of the required financial and non-financial
      covenants.




The
      Agreement does not require the Company to use lockbox or similar arrangements
      pursuant to which the bank would exercise control over collection proceeds
      and
      the discretion to reduce indebtedness under the Agreement. If an event of
      default exists, the bank may offset against the Company’s indebtedness all funds
      of the Company that are held in accounts at the bank. The Company is not
      required to maintain deposit balances at the bank, although the Company has
      elected to utilize the bank’s treasury management services.




We
      expect
      that cash flows from operations and the borrowing availability under our
      revolving credit facility will provide sufficient liquidity to meet the
      Company’s normal operating requirements, debt service and expected capital
      expenditures. Subject to limitations set forth in the Agreement, funds available
      under the revolving credit facility may be utilized to finance
      acquisitions.




***Contractual
      Obligations and Off-Balance Sheet Arrangements***




The
      Company’s future contractual obligations and potential commercial commitments as
      of February 28, 2007 are summarized as follows (in thousands):




**Payments
                Due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 Year**
            
            **1-3**
              **Years**
            
            **4-5**
              **Years**
            
            **After
                5**
              **Years**Revolving
                credit facility
            
            $
            24,361
            
            
            ―
            
            $
            24,361
            
            
            ―
            
            
            ―Long-term
                debt
            
            
            1,345
            
            
            131
            
            
            627
            
            
            74
            
            
            513Capital
                lease obligations
            
            
            572
            
            
            160
            
            
            303
            
            
            109
            
            
            ―Operating
                leases
            
            
            30,836
            
            
            7,806
            
            
            12,771
            
            
            7,060
            
            
            3,199Estimated
                interest payments
            
            
            4,173
            
            
            2,488
            
            
            1,343
            
            
            145
            
            
            197Total
                Contractual Obligations (including interest)
            
            $
            61,287
            
            $
            10,585
            
            $
            39,405
            
            $
            7,388
            
            $
            3,909





**Expiration
                Per Period****Other
                Commercial Commitments**
            
            **Amounts**
              **Committed**
            
            **Less
                Than 1 Year**Consigned
                inventory
            
            $
            6,278
            
            $
            6,278Standby
                letter of credit
            
            
            926
            
            
            926Total
                Other Commercial Commitments
            
            $
            7,204
            
            $
            7,204




As
      described above under Liquidity and Capital Resources, most of the Company’s
      indebtedness bears interest at variable rates. In addition, borrowings
      outstanding under the revolving credit line fluctuate. The estimated interest
      payments reflected in the table above are based on both the amount outstanding
      under the revolving credit facility and the variable interest rate in effect
      as
      of February 28, 2007.


-16-




In
      October 2006 the Company entered into two interest rate swap agreements totaling
      $20 million whereby the Company has agreed to exchange, at monthly intervals,
      the difference between the fixed rates of 5.04% and 5.07% and LIBOR, amounts
      as
      calculated by reference to a notional principal amount of $10 million on each
      interest rate swap agreement. The interest rate swaps mature in November 2009
      and 2011 respectively.




At
      inception, the derivatives qualify for hedge accounting. The fair value of
      the
      derivatives represented a liability of $142,963 at February 28, 2007. The
      derivatives were effective as hedges at February 28, 2007. The liability to
      record the hedges at fair value will only be realized if the Company terminates
      the derivative contracts prior to maturity.




The
      majority of operating lease commitments is for office and warehouse space
      occupied by the Company’s branch operations. The Company also has operating
      leases for vehicles and office equipment. Management believes that its capital
      resources are better utilized for working capital needed to support the growth
      of operations than for investment in real property and other capital assets
      that
      may be leased.




Consigned
      inventory is held at a majority of the Company’s branch locations in Texas,
      California and Georgia. Under terms of the consignment program, the Company
      pays
      for such inventory in the month after it is sold. The supplier of the consigned
      inventory, Haier USA, retains title and legal control over the inventory until
      it is purchased by the Company.




The
      Company customarily issues purchase orders to suppliers for inventory based
      on
      current requirements. Such purchase orders are usually fulfilled by suppliers,
      and accepted by the Company, in less than sixty days. Most of such orders do
      not
      represent contractual obligations and may be amended or canceled prior to
      fulfillment.




A
      standby
      letter of credit is used as collateral under a self-insurance program for
      workers’ compensation, general liability and vehicles. The letter of credit is
      not expected to result in any material loss or obligation, as insurance claims
      under the program are paid in the ordinary course of business.





The
      Company has no off-balance sheet arrangements. The Company has not entered
      into
      any transactions with unconsolidated entities such as special-purpose entities
      that would be established for the purpose of facilitating off-balance sheet
      arrangements.




***Recent
      Accounting Pronouncements***




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Standards (“SFAS”) No. 157, “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles and expands disclosures about
      fair value measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The provisions of SFAS No. 157 are effective for
      the
      Company beginning March 1, 2008. We are currently evaluating the impact of
      adopting SFAS No. 157 on our consolidated financial statements but the Company
      believes the impact, if any, will not be material to the consolidated financial
      statement.




In
      September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how
      the effects of prior year uncorrected misstatements should be considered when
      quantifying misstatements in current year financial statements. SAB No. 108
      requires companies to quantify misstatements using a balance sheet and income
      statement approach and to evaluate whether either approach results in
      quantifying an error that is material in light of relevant quantitative and
      qualitative factors. SAB No. 108 permits existing public companies to initially
      apply its provisions either by (i) restating prior financial statements as
      if
      the “dual approach” had always been used or (ii) recording the cumulative effect
      of initially applying the “dual approach” as adjustments to the carrying value
      of assets and liabilities as of January 1, 2006 with an offsetting adjustment
      recorded to the opening balance of retained earnings. Use of the “cumulative
      effect” transition method requires detailed disclosure of the nature and amount
      of each individual error being corrected through the cumulative adjustment
      and
      how and when it arose. The adoption of SAB No. 108 did not have a material
      impact on the Company’s consolidated financial statements.




In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN No. 48”). This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.”




-17-




This
      interpretation seeks to reduce the diversity in practice associated with certain
      aspects of measurement and recognition in accounting for income taxes. In
      addition, it requires expanded disclosure with respect to the uncertainty in
      income taxes. FIN No. 48 is effective for fiscal years beginning after December
      15, 2006; thus, the Company’s effective date is March 1, 2007. The Company has
      not evaluated the potential impact to the consolidated financial statements,
      but
      believes the impact if any, is not expected to be material to the consolidated
      financial statements.




***Critical
      Accounting Policies***




The
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States requires management to make assumptions
      and estimates that affect reported amounts and related disclosures. Actual
      results, once known, may vary from these estimates. We base our estimates on
      historical experience, current trends and other factors that are believed to
      be
      reasonable under the circumstances. We believe that the following accounting
      policies require a higher degree of judgment in making its estimates and,
      therefore, are critical accounting policies.




*Allowance
      for Doubtful Accounts*




The
      Company records an allowance for doubtful accounts for estimated losses
      resulting from the inability to collect accounts receivable from customers.
      The
      Company establishes the allowance based on historical experience, credit risk
      of
      specific customers and transactions, and other factors. We believe that the
      lack
      of customer concentration is a significant factor that mitigates the Company’s
      accounts receivable credit risk. Two customers represented 6% and 2% of
      consolidated fiscal 2007 sales, respectively, and no other customer comprised
      as
      much as 1% of sales. The number of customers and their distribution across
      the
      geographic areas served by the Company help to reduce the Company’s credit
      exposure to a single customer or to economic events that affect a particular
      geographic region. Although we believe that our allowance for doubtful accounts
      is adequate, any future condition that would impair the ability of a broad
      section of the Company’s customer base to make payments on a timely basis may
      require us to record additional allowances.




*Inventories*




Inventories
      consist of HVAC equipment, parts and supplies and are valued at the lower of
      cost or market value using the moving average cost method. At February 28,
      2007, all inventories represented finished goods held for sale. When necessary,
      the carrying value of obsolete or excess inventory is reduced to estimated
      net
      realizable value. The process for evaluating the value of obsolete or excess
      inventory requires estimates by management concerning future sales levels and
      the quantities and prices at which such inventory can be sold in the ordinary
      course of business.




The
      Company holds a substantial amount of HVAC equipment inventory at several
      branches on consignment from a supplier. The terms of this arrangement provide
      that the inventory is held for sale in bonded warehouses at the branch premises,
      with payment due only when products are sold. The supplier retains legal title
      to the consigned inventory. The Company is responsible for damage to and loss
      of
      inventory that may occur at its premises.




This
      consignment arrangement allows the Company to have inventory available for
      sale
      to customers without incurring a payment obligation for the inventory prior
      to a
      sale. Because of the control retained by the supplier and the uncertain time
      when a payment obligation will be incurred, the Company does not record the
      consigned inventory as an asset upon receipt with a corresponding liability.
      Rather, the Company records a liability to the supplier only upon sale of the
      inventory to a customer. The amount of the consigned inventory is disclosed
      in
      the Notes to the Company’s financial statements as a contingent
      obligation.




*Vendor
      Rebates*




The
      Company receives rebates from certain vendors based on the volume of product
      purchased from the vendor. The Company records rebates when they are earned,
      (i.e., as specified purchase volume levels are reached or are reasonably assured
      of attainment). Vendor rebates attributable to unsold inventory are carried
      as a
      reduction of the carrying value of inventory until such inventory is sold,
      at
      which time the related rebates are used to reduce cost of
      sales.


-18-




*Goodwill*




Goodwill
      represents the excess of purchase price paid over the fair value of net assets
      acquired in connection with business acquisitions. The assessment of
      recoverability of goodwill requires management to project future operating
      results and other variables to estimate the fair value of the enterprise. Future
      operating results can be affected by changes in market or industry conditions.




*Self-Insurance
      Reserves*




The
      Company is self-insured for various levels of general liability, workers’
compensation, vehicle, and employee medical coverage. The level of exposure
      from
      catastrophic events is limited by stop-loss and aggregate liability reinsurance
      coverage. When estimating the self-insurance liabilities and related reserves,
      the Company considers a number of factors, which include historical claims
      experience, demographic factors and severity factors. If actual claims or
      adverse development of loss reserves occurs and exceed these estimates,
      additional reserves may be required that could materially impact the
      consolidated results of operations.




*Interest
      Rate Derivative Instruments*




The
      Company has interest rate derivatives that qualify for hedge accounting in
      accordance with SFAS No. 133, Accounting for Derivative Instruments and
      Hedging Activities. The fair value of these derivative instruments is reflected
      on the Company’s balance sheets, and changes in the fair value of such
      derivatives are recorded net of deferred tax benefit in other comprehensive
      loss. Payments received or paid by the Company during the term of the derivative
      contract as a result of differences between the fixed interest rate of the
      derivative and the market interest rate are recorded as adjustments to interest
      expense.




*Safe
      Harbor Statement*




This
      Annual Report on Form 10-K includes forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E
      of the Securities Exchange Act of 1934. Forward-looking statements include
      statements concerning plans, objectives, goals, strategies, future events or
      performance and underlying assumptions and other statements, which are other
      than statements of historical facts. Forward-looking statements involve risks
      and uncertainties, which could cause actual results or outcomes to differ
      materially. The Company’s expectations and beliefs are expressed in good faith
      and are believed by the Company to have a reasonable basis, but there can be
      no
      assurance that management’s expectations, beliefs or projections will be
      achieved or accomplished. The forward-looking statements in this document are
      intended to be subject to the safe harbor protection provided under applicable
      securities laws. In addition to other factors and matters discussed elsewhere
      herein, the following are important factors that, in the view of the Company,
      could cause actual results to differ materially from those discussed in the
      forward-looking statements: the ability of the Company to continue to expand
      through acquisitions, the availability of debt or equity capital to fund the
      Company’s expansion program, unusual weather conditions, the effects of
      competitive pricing and general economic conditions that affect the level of
      construction activity.




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




The
      Company is subject to market risk exposure related to changes in interest rates
      on its bank credit facility, which includes revolving credit and term notes.
      These instruments carry interest at a pre-agreed upon percentage point spread
      from either the prime interest rate or LIBOR. The Company may, at its option,
      fix the interest rate for borrowings under the facility based on a spread over
      LIBOR for 30 days to 3 months.




At
      February 28, 2007 the Company had $25.0 million outstanding under its bank
      credit facility, of which $5.0 million is subject to variable interest rates.
      Based on this balance, an immediate change of one percent in the interest rate
      would cause a change in interest expense of approximately $50,000, and no change
      per basic share, on an annual basis. The Company has two interest rate
      derivative instruments of $10 million each for a total notional amount of $20
      million that expire in November 2009 and 2011, respectively. The instruments
      fix
      LIBOR at 5.04% and 5.07% respectively, on the notional amounts.


-19-


**Item 8.
      Financial Statements and Supplementary
      Data.**







**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**OF
      ACR GROUP, INC. AND SUBSIDIARIES**




**Page**Report
                of Independent Registered Public Accounting Firm
            21Consolidated
                Balance Sheets as of February 28, 2007 and 2006
            22Consolidated
                Statements of Income for the fiscal years ended February 28, 2007,
                2006 and 2005
            24Consolidated
                Statements of Shareholders’ Equity for the fiscal years ended
                February 28, 2007, 2006 and 2005
            25Consolidated
                Statements of Cash Flows for the fiscal years ended February 28,
                2007, 2006 and 2005
            26Notes
                to Consolidated Financial Statements
            27Schedule
                of Valuation and Qualifying Accounts
            41




-20-


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors and Shareholders


ACR
      Group, Inc.




We
      have
      audited the accompanying consolidated balance sheets of ACR Group, Inc. and
      subsidiaries as of February 28, 2007 and 2006 and the related consolidated
      statements of income, shareholders’ equity, and cash flows for each of the three
      years in the period ended February 28, 2007. Our audits also included the
      financial statement schedule listed in the index at Item 15(a). These
      financial statements and schedule are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements and 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion of the effectiveness of the Company’s internal control over financial
      reporting. Accordingly we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements and schedule, assessing the accounting principles
      used
      and significant estimates made by management, as well as evaluating the overall
      presentation of the financial statements and the schedule. We believe that
      our
      audits provide a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of ACR Group, Inc. and
      subsidiaries at February 28, 2007 and 2006 and the results of their
      operations and their cash flows for each of the three years in the period ended
      February 28, 2007, in conformity with accounting principles generally accepted
      in the United States of America.




As
      discussed in Note 1 to the Consolidated Financial Statements, effective March
      1,
      2006, the Company adopted the provisions of FAS 123(R) “Share-based
      Payments”.




Also,
      in
      our opinion, the schedule listed in the accompanying index presents fairly,
      in
      all material respects, the information set forth therein for the years ended
      February 28, 2007, 2006 and 2005.




BDO
      Seidman, LLP




Houston,
      Texas


May 25,
      2007


-21-


**ACR
      GROUP, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEETS**




**(in
      thousands)**




**ASSETS**




**February
                28,**Current
                assets:
            
            **2007**
            
            **2006**Cash
            
            $
            1,135
            
            $
            1,275Accounts
                receivable, net
            
            
            23,330
            
            
            22,380Inventories,
                net
            
            
            43,516
            
            
            38,264Prepaid
                expenses and other current assets
            
            
            1,619
            
            
            1,250Deferred
                income taxes
            
            
            1,652
            
            
            1,338Total
                current assets
            
            
            71,252
            
            
            64,507Property
                and equipment, net
            
            
            5,647
            
            
            4,844Goodwill
            
            
            5,408
            
            
            5,408Interest
                derivative asset
            
            
            ―
            
            
            298Other
                assets
            
            
            853
            
            
            979Total
                assets
            
            $
            83,160
            
            $
            76,036


The
      accompanying notes are an integral part of these consolidated financial
      statements.


-22-





**ACR
      GROUP, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEETS**




**(in
      thousands, except per share data)**




**LIABILITIES
      AND SHAREHOLDERS’ EQUITY**




**February
                28,****2007**
            
            **2006**Current
                liabilities:Current
                maturities of long-term debt
            
            $
            131
            
            $
            128Current
                maturities of capital lease obligations
            
            
            160
            
            
            145Accounts
                payable
            
            
            23,106
            
            
            25,002Accrued
                expenses and other current liabilities
            
            
            5,931
            
            
            4,597Income
                tax payable
            
            
            232
            
            
            146Total
                current liabilities
            
            
            29,560
            
            
            30,018Borrowings
                under revolving credit agreement
            
            
            24,361
            
            
            22,940Long-term
                notes, net of current maturities
            
            
            1,214
            
            
            1,344Long-term
                capital lease obligations, net of current maturities
            
            
            412
            
            
            248Interest
                derivative liability
            
            
            143
            
            
            ―Deferred
                income taxes
            
            
            184
            
            
            340Total
                long-term liabilities
            
            
            26,314
            
            
            24,872Commitments
                and contingencies (Notes 5 and 10)Shareholders’
                equity:Preferred
                stock, $.01 par, authorized 2,000,000 shares, none outstanding
            
            
            ―
            
            
            ―Common
                stock, $.01 par, authorized 25,000,000 shares, 12,113,078 and 12,000,294
                issued and outstanding at February 28, 2007 and 2006, respectively
            
            
            121
            
            
            120Paid-in
                capital
            
            
            43,286
            
            
            44,413Accumulated
                other comprehensive loss, net of tax
            
            
            (88
            )
            
            ―Unearned
                restricted stock compensation
            
            
            ―
            
            
            (1,612
            )Accumulated
                deficit
            
            
            (16,033
            )
            
            (21,775
            )Total
                shareholders’ equity
            
            
            27,286
            
            
            21,146Total
                liabilities and shareholders’ equity
            
            $
            83,160
            
            $
            76,036


The
      accompanying notes are an integral part of these consolidated financial
      statements.




-23-


**ACR
      GROUP, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF INCOME**




**(in
      thousands, except per share data)**





**For
                the Years Ended**
              **February
                28,****2007**
            
            **2006**
            
            **2005**Sales
            
            $
            239,643
            
            $
            204,312
            
            $
            199,553Cost
                of sales
            
            
            178,607
            
            
            155,981
            
            
            152,908Gross
                profit
            
            
            61,036
            
            
            48,331
            
            
            46,645Selling,
                general and administrative expenses
            
            
            50,042
            
            
            43,197
            
            
            39,315Operating
                income
            
            
            10,994
            
            
            5,134
            
            
            7,330Interest
                expense
            
            
            2,451
            
            
            1,489
            
            
            1,060Interest
                derivative (gain) loss
            
            
            (84
            )
            
            (247
            )
            
            50Other
                non-operating income
            
            
            (659
            )
            
            (666
            )
            
            (579
            )Income
                before income taxes
            
            
            9,286
            
            
            4,558
            
            
            6,799Provision
                (benefit) for income taxes:Current
            
            
            3,960
            
            
            1,577
            
            
            2,709Deferred
            
            
            (416
            )
            
            227
            
            
            (121
            )Net
                income
            
            $
            5,742
            
            $
            2,754
            
            $
            4,211Earnings
                per common share:Basic
            
            $
            .51
            
            $
            .25
            
            $
            .39Diluted
            
            $
            .49
            
            $
            .24
            
            $
            .38


The
      accompanying notes are an integral part of these consolidated financial
      statements.


-24-


**ACR
      GROUP, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**




**(in
      thousands, except share data)**




**No.
                of**
              **Shares
                Outstanding**
            
            **Par**
              **Value**
            
            **Paid-in**
              **Capital**
            
            **Unearned**
              **Restricted**
              **Stock**
              **Compensation**
            
            **Accumulated
                Other Comprehensive Income (loss)**
            
            **Accumulated**
              **Deficit**
            
            **Total**Balance,
                February 29, 2004
            
            
            10,681,294
            
            $
            107
            
            $
            41,691
            
            $
            —
            
            $
            —
            
            $
            (28,740
            )
            $
            13,058Issuances
                of shares of restricted common stock
            
            
            1,084,000
            
            
            11
            
            
            2,261
            
            
            (2,272
            )
            
            —
            
            
            —
            
            
            —Stock
                issuances from exercise of stock options
            
            
            39,000
            
            
            —
            
            
            46
            
            
            —
            
            
            —
            
            
            —
            
            
            46Amortization
                of unearned restricted stock compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            389
            
            
            —
            
            
            —
            
            
            389Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4,211
            
            
            4,211Balance,
                February 28, 2005
            
            
            11,804,294
            
            
            118
            
            
            43,998
            
            
            (1,883
            )
            
            —
            
            
            (24,529
            )
            
            17,704Issuances
                of shares of restricted common stock
            
            
            50,000
            
            
            1
            
            
            136
            
            
            (137
            )
            
            —
            
            
            —
            
            
            —Stock
                issuances from exercise of stock options
            
            
            146,000
            
            
            1
            
            
            171
            
            
            —
            
            
            —
            
            
            —
            
            
            172Amortization
                of unearned restricted stock compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            408
            
            
            —
            
            
            —
            
            
            408Tax
                benefit from restricted stock compensation
            
            
            —
            
            
            —
            
            
            108
            
            
            —
            
            
            —
            
            
            —
            
            
            108Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,754
            
            
            2,754Balance,
                February 28, 2006
            
            
            12,000,294
            
            
            120
            
            
            44,413
            
            
            (1,612
            )
            
            —
            
            
            (21,775
            )
            
            21,146Effect
                of adoption of SFAS 123(R)
            
            
            —
            
            
            —
            
            
            (1,612
            )
            
            1,612
            
            
            —
            
            
            —
            
            
            —Issuances
                (net) of shares of restricted common stock
            
            
            89,284
            
            
            1
            
            
            (165
            )
            
            —
            
            
            —
            
            
            —
            
            
            (164
            )Stock
                issuances from exercise of stock options
            
            
            23,500
            
            
            —
            
            
            35
            
            
            —
            
            
            —
            
            
            —
            
            
            35Restricted
                stock compensation
            
            
            —
            
            
            —
            
            
            512
            
            
            —
            
            
            —
            
            
            —
            
            
            512Tax
                benefit from restricted stock compensation
            
            
            —
            
            
            —
            
            
            103
            
            
            —
            
            
            —
            
            
            —
            
            
            103Comprehensive
                Income:Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            5,742
            
            
            5,742Other
                comprehensive loss, change in fair market value of interest derivative,
                net of tax
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (88
            )
            
            —
            
            
            (88
            )Comprehensive
                Income:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,654Balance,
                February 28, 2007
            
            
            12,113,078
            
            $
            121
            
            $
            43,286
            
            $
            —
            
            $
            (88
            )
            $
            (16,033
            )
            $
            27,286


The
      accompanying notes are an integral part of these consolidated financial
      statements.


-25-


**ACR
      GROUP, INC. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**(in
      thousands)**




**2007**
            
            **2006**
            
            **2005**Cash
                flows from operating activities:Net
                income
            
            $
            5,742
            
            $
            2,754
            
            $
            4,211Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            1,008
            
            
            889
            
            
            914Provision
                for doubtful accounts
            
            
            799
            
            
            735
            
            
            557Loss
                (gain) on sale of assets
            
            
            (28
            )
            
            (19
            )
            
            30Market
                value of interest derivative
            
            
            (84
            )
            
            (247
            )
            
            50Deferred
                income taxes
            
            
            (416
            )
            
            227
            
            
            (121
            )Amortization
                of unearned restricted stock compensation
            
            
            512
            
            
            408
            
            
            389Changes
                in operating assets and liabilities, net of acquisitions:Accounts
                receivable
            
            
            (1,748
            )
            
            (2,196
            )
            
            (3,205
            )Inventories
            
            
            (5,252
            )
            
            (5,341
            )
            
            (4,740
            )Prepaid
                expenses and other assets
            
            
            (220
            )
            
            (882
            )
            
            509Accounts
                payable
            
            
            (1,896
            )
            
            6,728
            
            
            (1,002
            )Accrued
                expenses and other liabilities
            
            
            1,258
            
            
            574
            
            
            874Tax
                benefit from restricted stock compensation
            
            
            —
            
            
            108
            
            
            —Net
                cash (used in) provided by operating activities
            
            
            (325
            )
            
            3,738
            
            
            (1,534
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (1,452
            )
            
            (1,180
            )
            
            (817
            )Business
                acquisition, net of cash acquired
            
            
            —
            
            
            (148
            )
            
            ―Proceeds
                from disposition of assets
            
            
            11
            
            
            59
            
            
            236Receipts
                (payments) on derivative instrument
            
            
            382
            
            
            (120
            )
            
            (445
            )Net
                cash used in investing activities
            
            
            (1,059
            )
            
            (1,389
            )
            
            (1,026
            )Cash
                flows from financing activities:Net
                borrowings (payments) on revolving credit facility
            
            
            1,420
            
            
            (3,060
            )
            
            4,914Proceeds
                from long-term debt
            
            
            ―
            
            
            ―
            
            
            875Payments
                on long-term debt
            
            
            (316
            )
            
            (321
            )
            
            (1,192
            )Proceeds
                from exercise of stock options
            
            
            35
            
            
            172
            
            
            46Tax
                benefit from restricted stock compensation
            
            
            103
            
            
            —
            
            
            —Net
                cash provided by (used in) financing activities
            
            
            1,242
            
            
            (3,209
            )
            
            4,643Net
                (decrease) increase in cash
            
            
            (140
            )
            
            (860
            )
            
            2,083Cash
                at beginning of year
            
            
            1,275
            
            
            2,135
            
            
            52Cash
                at end of year
            
            $
            1,135
            
            $
            1,275
            
            $
            2,135Schedule
                of non-cash investing and financing activities:Purchases
                of property and equipmentFor
                notes payable
            
            $
            —
            
            $
            —
            
            $
            32Under
                capital leases
            
            
            367
            
            
            277
            
            
            87Supplemental
                cash flow information:Interest
                paid
            
            
            2,451
            
            
            1,489
            
            
            1,060Interest
                derivative payments (receipts)
            
            
            (571
            )
            
            (120
            )
            
            445Income
                taxes paid
            
            
            3,710
            
            
            1,951
            
            
            2,225




The
      accompanying notes are an integral part of these consolidated financial
      statements.


-26-




**ACR
      GROUP, INC. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**(amounts
      in thousands, except share and per share data)**




**1—Description
      of Business and Summary of Significant Accounting Policies**




***Description
      of Business***




ACR
      Group, Inc.’s (which together with its subsidiaries is herein referred to as the
“Company”, we, us or our) principal business is the wholesale distribution of
      heating, ventilating, air conditioning and refrigeration (“HVAC”) equipment,
      parts and supplies in the southern United States, including operations in:
      Arizona, California, Colorado, Florida, Georgia, Louisiana, Nevada, New Mexico,
      Tennessee and Texas. Approximately 34% of our revenues are from sales of HVAC
      equipment; the remaining 66% of our sales is from installation supplies and
      service parts. Substantially all of the Company’s sales are to contractor
      dealers and institutional end-users.




Statement
      of Financial Accounting Standards No. 131, Disclosures about Segments of an
      Enterprise and Related Information, allows the aggregation of an enterprise’s
      segments if they are similar. The Company operates in different geographic
      areas; however, we have reviewed the aggregation criteria and determined that
      the Company operates as one segment based on the high degree of similarity
      of
      the following aspects of our operations:







nature
                of products and servicescustomer
                markets servedmethods
                used to acquire and distribute productseconomic
                characteristics that influence the results of operations in different
                geographical areas




***Basis
      of Consolidation***




The
      consolidated financial statements include the accounts of the Company and all
      of
      its wholly owned subsidiaries. All significant intercompany balances and
      transactions have been eliminated.




***Use
      of Estimates***




The
      preparation of consolidated financial statements in accordance with U.S.
      generally accepted accounting principles requires the Company to make estimates
      and judgments that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the consolidated
      financial statements and the reported amounts of revenues and expenses during
      the reporting period. On an ongoing basis the Company evaluates significant
      estimates. These estimates include valuation reserves for accounts receivable,
      inventory and income taxes including the valuation allowance for deferred tax
      assets, reserves related to self-insurance programs, valuation of goodwill,
      contingencies and litigation. Estimates are based on historical experience
      and
      on various other assumptions that are believed to be reasonable, the results
      of
      which form the basis for making judgments about the carrying value of our assets
      and liabilities. Actual results may differ from these estimates under different
      assumptions or conditions.




***Revenue
      Recognition***




Revenue
      is recognized in accordance with Securities and Exchange Commission Staff
      Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (which
      superceded SAB No. 101, “Revenue Recognition in Financial Statements,” as
      amended). Revenue consists of sales of HVAC products. SAB 104 requires that
      four
      basic criteria must be met before revenue can be recognized: (1) persuasive
      evidence of an arrangement exists, (2) delivery has occurred or services
      have been rendered, (3) the amounts recognized are fixed and determinable,
      and (4) collectibility is reasonably assured. Revenue is recorded when
      shipment of products has occurred. Assessment of collection is based on a number
      of factors, including past transactions, credit-worthiness of customers,
      historical trends and other information. Substantially all customer returns
      relate to products that are returned under warranty obligations underwritten
      by
      manufacturers, effectively eliminating the risk of loss for customer returns.


-27-




***Allowance
      for Doubtful Accounts***




The
      Company records an allowance for doubtful accounts for estimated losses
      resulting from the inability to collect accounts receivable from customers.
      The
      Company establishes the allowance based on historical experience, credit risk
      of
      specific customers and transactions, and other factors. Management believes
      that
      the lack of customer concentration is a significant factor that mitigates the
      Company’s accounts receivable credit risk. The two largest customers represented
      6% and 2% of consolidated fiscal 2007 sales, respectively, and no other customer
      comprised as much as 1% of sales.




The
      number of customers and their distribution across the geographic areas served
      by
      the Company help to reduce the Company’s credit exposure to a single customer or
      to economic events that affect a particular geographic region. At
      February 28, 2007 and 2006, the allowance for doubtful accounts totaled
      $1,090 and $906 respectively. Although the Company believes that its allowance
      for doubtful accounts is adequate, any future condition that would impair the
      ability of a broad section of the Company’s customer base to make payments on a
      timely basis may require the Company to record additional allowances.




***Inventories***




Inventories
      consist of HVAC equipment, parts and supplies and are valued at the lower of
      cost or market value using the moving average cost method. At February 28,
      2007 and 2006, all inventories represented finished goods held for sale. When
      necessary, the carrying value of obsolete or excess inventory is reduced to
      estimated net realizable value. The process for evaluating the value of obsolete
      or excess inventory requires estimates by management concerning future sales
      levels and the quantities and prices at which such inventory can be sold in
      the
      ordinary course of business. Inventory reserve policies are reviewed
      periodically, reflecting current risks, trends and changes in industry
      conditions. A reserve for estimated inventory shrinkage is also maintained
      to
      consider inventory shortages determined from cycle counts and physical
      inventories. At February 28, 2007 and 2006, inventory reserves totaled $420
      and $548, respectively.




The
      Company has an arrangement with an HVAC equipment manufacturer and a bonded
      warehouse agent whereby HVAC equipment is held for sale in bonded warehouses
      located at the premises of certain of the Company’s operations, with payment due
      only when products are sold. The supplier retains legal title with respect
      to
      the consigned inventory. The Company is responsible for damage to and loss
      of
      inventory that may occur at its premises. Such inventory is accounted for as
      consigned merchandise and is not recorded on the Company’s balance sheets. The
      cost of consigned inventory held in the bonded warehouses was $6,278 and $9,407
      at February 28, 2007 and 2006, respectively.




***Vendor
      Rebates***




The
      Company receives rebates from certain vendors based on the volume of product
      purchased from the vendor. The Company records rebates when they are earned,
      (i.e., as specified purchase volume levels are reached or are reasonably assured
      of attainment). The Company’s accounting for rebates is in accordance with
      Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a
      Customer (Including a Reseller) for Certain Consideration Received from a
      Vendor.” EITF 02-16 requires that the Company record rebates as a reduction of
      inventory until the related product is sold, at which time such rebates are
      reflected as a reduction of cost of sales in the consolidated statements of
      income. Throughout the year, the Company estimates the amount of the rebate
      earned based on our estimate of purchases to date relative to the purchase
      levels that mark our progress toward earning the rebates. Quarterly revision
      of
      these estimates of earned vendor rebates is based on actual purchase levels.




***Property
      and Equipment***




Property
      and equipment are stated at cost. Depreciation and amortization are provided
      on
      the straight-line method over the following estimated useful lives.




Buildings
            20-40
                yearsLeasehold
                improvements
            Lesser
                of useful life or lease termFurniture
                and fixtures
            5-7
                yearsVehicles
            3-6
                yearsWarehouse
                and office equipment
            3-10
                years


-28-




The
      Company reviews the carrying value of property, plant, and equipment for
      impairment whenever events and circumstances indicate that the carrying value
      of
      an asset may not be recoverable from the estimated future cash flows expected
      to
      result from its use and eventual disposition. In cases where undiscounted
      expected future cash flows are less than the carrying value, an impairment
      loss
      is recognized equal to an amount by which the carrying value exceeds the fair
      value of assets. The factors considered by management in performing this
      assessment include current operating results, trends, and prospects, as well
      as
      the effects of obsolescence, demand, competition, and other economic factors,
      There was no impairment charge recorded for the years ended February 28, 2007,
      2006, and 2005.




***Goodwill***




Goodwill
      is recorded when the purchase price paid for an acquisition exceeds the
      estimated fair value of the net identified tangible and intangible assets
      acquired. In accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” an annual
      impairment review is performed, or more frequently if indicators of potential
      impairment exist, to determine if the carrying value of the recorded goodwill
      is
      impaired. The impairment review process compares the fair value of the reporting
      unit in which goodwill resides to its carrying value. The Company’s reporting
      unit is at the enterprise or consolidated company level. If the fair value
      of
      the reporting unit is less than its carrying value, an impairment loss is
      recorded to the extent that the implied fair value of goodwill (as defined
      under
      SFAS No. 142) within the reporting unit is less than its carrying value.




At
      February 28, 2007, the Company had goodwill of $5,408. During fiscal 2006,
      the
      Company recorded additional goodwill of $150 related to an acquisition. The
      Company completed its annual impairment test as of February 28, 2007. The
      impairment test was conducted at the enterprise level (the reporting unit)
      for
      the Company, and no impairment charge was necessary for the year ended
      February 28, 2007.




***Interest
      Rate Derivative Instruments***




At
      February 28, 2007, the Company’s interest rate derivative instruments qualify as
      hedges, in accordance with SFAS No. 133, Accounting for Derivative
      Instruments and Hedging Activities. The fair value of the derivative instruments
      is reflected on the Company’s balance sheets, and changes in the fair value of
      such derivatives are recorded in accumulated other comprehensive income (loss),
      net of income tax, if the derivative is effective as a hedge. Ineffective
      portions of changes in fair value of interest rate derivative instrument are
      recognized in earnings. Payments made or received by the Company during the
      term
      of the derivative contract as a result of differences between the fixed interest
      rate of the derivative instruments and the market interest rate are offset
      against interest expense in the Company’s statement of income. At February 28,
      2007, the Company’s derivative interest rate instruments were effective as
      hedges.




At
      February 28, 2007, the Company had two $10 million notional value derivative
      instruments maturing in 2009 and 2011, at fixed rates of 5.04% and 5.07%,
      respectively both of which are less then the current market rate. At February
      28, 2006 we had a $15 million notional value derivative instrument at a fixed
      rate of 4.38%, which was terminated prio rto the scheduled maturity. At
      February 28, 2007 the Company recorded $143 in interest derivative
      liability, and at February 28, 2006 recorded $298 as an interest derivative
      asset to report the instruments at fair value. For the year ended
      February 28, 2007 the Company recorded in accumulated other comprehensive
      loss a decline in fair value of $88, net of tax. For the years ended February
      28, 2006 and 2005, the Company recorded an unrealized gain (loss) of $247 and
      $(50), respectively, from changes in the fair value of interest rate derivative
      instruments and payments made or received as a result of differences between
      the
      fixed interest rate of the derivative instruments and the market interest rate
      during such periods.




***Comprehensive
      Income***




SFAS
      No.
      130, “Reporting Comprehensive Income,” establishes the rules for the reporting
      and display of comprehensive income (loss) and its components. SFAS No. 130
      requires the Company to include unrealized gains or losses, net of related
      taxes, on changes in the fair value of outstanding hedge positions. Generally,
      gains are attributed to an increase in the LIBOR rate over the fixed rate on
      our
      interest rate hedges and losses are attributed to a decrease in the LIBOR rate
      over the fixed rate on our interest rate hedges.




***Self-Insurance
      Reserves***




We
      are
      self-insured for various levels of general liability, workers’ compensation,
      vehicle, and employee medical coverage. The level of exposure from catastrophic
      events is limited by stop-loss and aggregate liability reinsurance coverage.
      When estimating the self-insurance liabilities and related reserves, the Company
      considers a number of factors, which include historical claims experience,
      demographic factors and severity factors.


-29-




If
      actual
      claims or adverse development of loss reserves occur and exceed these estimates,
      additional reserves may be required that could materially impact the
      consolidated results of operations. The estimation process contains uncertainty
      since management must use judgment to estimate the ultimate cost that will
      be
      incurred to settle reported claims and unreported claims for incidents incurred
      but not reported as of the balance sheet date. In February 2005, the Company
      began to self-insure its general liability, workers’ compensation, and vehicle
      liability exposures. At February 28, 2007 and 2006, $1,163 and $702 of
      reserves were established related to all such insurance programs.




***Income
      Taxes***




The
      Company and its subsidiaries file a consolidated federal income tax return.
      The
      Company uses the liability method in accounting for income taxes. Under the
      liability method, deferred tax assets and liabilities are determined based
      on
      differences between financial reporting and tax bases of assets and liabilities
      and are measured using the enacted tax rates and laws that will be in effect
      when the differences are expected to reverse. As income tax returns are
      generally not filed until well after the fiscal year financial statements are
      completed, the amounts recorded at fiscal year-end reflect estimates of what
      the
      final amounts will be when the actual income tax returns are filed for that
      fiscal year. In addition, estimates are often required with respect to, among
      other things, the appropriate state income tax rates to use in the various
      states where the Company and its subsidiaries are required to file, the
      potential utilization of operating loss carryforwards for both federal and
      state
      income tax purposes and valuation allowances required, if any, for tax assets
      that may not be realizable in the future.




***Stock-Based
      Compensation***




Prior
      to
      March 1, 2006, the Company accounted for share-based compensation for stock
      options under the disclosure-only provisions of SFAS No. 123, “Accounting for
      Stock Based Compensation.” Accordingly, no compensation cost was recognized
      for the options granted under the Company’s stock option plan prior to March 1,
      2006. Effective March 1, 2006, the Company adopted the provisions of SFAS No.
      123 (Revised 2004), “Share-Based Payment,” (“SFAS 123R”). This Statement is
      a revision of SFAS No. 123 and supersedes Accounting Principles Board (APB)
      Opinion No. 25, “Accounting for Stock Issued to Employees.” Using the fair value
      method and a Black-Scholes option pricing model, compensation cost recognized
      in
      the fiscal year ended February 28, 2007 included compensation costs for all
      stock option-based payments granted prior to, but not yet exercised, as of
      March
      1, 2006. As prescribed by the modified prospective transition method in SFAS
      No. 123R, results for prior periods have not been restated.




The
      Company accounts for share-based compensation for restricted stock based on
      the
      market value at the grant date and records current expense based upon a
      straight-line amortization over the vesting period.




As
      a
      result of adopting SFAS No. 123R, stock-based compensation expense for stock
      options in the fiscal year ended February 28, 2007 was $3 net of tax. The
      Company had no outstanding stock options after the quarter ended May 31,
      2006.




-30-




Had
      compensation expense for stock options been determined consistent with SFAS
      123,
      prior to March 1, 2006 the Company’s net income and earnings per share would
      have been changed to the following pro forma amounts:




**Year
                Ended February 28,****2006**
            
            **2005**Net
                income applicable to common shareholders as reported
            
            $
            2,754
            
            $
            4,211Total
                stock-based employee compensation gain (expense) under fair value
                method
                for all awards, net of tax
            
            
            19
            
            
            (58
            )Pro
                forma income applicable to common shareholders
            
            $
            2,773
            
            $
            4,153Earnings
                per share:Basic:As
                reported
            
            $
            .25
            
            $
            .39Pro
                forma
            
            
            .25
            
            
            .39Diluted:As
                reported
            
            $
            .24
            
            $
            .38Pro
                forma
            
            
            .24
            
            
            .38





No
      options were granted during fiscal 2007, 2006 and 2005.




***Supplier/Sources
      of Supply***




The
      Company has one primary supplier of HVAC equipment and repair parts. Purchases
      from this supplier comprised 33% of total purchases in fiscal 2007 and 25%
      in
      fiscal 2006. Prior to fiscal 2006, the Company purchased a majority of its
      equipment and repair parts from two primary suppliers. Purchases from such
      suppliers comprised 43% of all purchases made in fiscal 2005. The Company has
      not encountered any significant difficulty to date in obtaining equipment and
      repair parts to support its operations at current or expected near-term future
      levels. Any significant interruption by such a manufacturer, or a termination
      of
      a distributor agreement, could temporarily disrupt the operations of certain
      subsidiaries. The Company believes that its relationships with suppliers of
      complementary equipment products are a mitigating factor against this
      risk.




***Reclassifications***




Certain
      reclassifications were made to the prior years’ financial statements to conform
      with current year presentation.





***Recent
      Accounting Pronouncements***





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements.” This Statement defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      SFAS No. 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. The provisions of SFAS No. 157 are effective for the Company beginning
      March 1, 2008. We are currently evaluating the impact of adopting SFAS No.
      157
      on our consolidated financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements.” SAB No. 108 addresses how
      the effects of prior year uncorrected misstatements should be considered when
      quantifying misstatements in current year financial statements. SAB No. 108
      requires companies to quantify misstatements using a balance sheet and income
      statement approach and to evaluate whether either approach results in
      quantifying an error that is material in light of relevant quantitative and
      qualitative factors. SAB No. 108 permits existing public companies to initially
      apply its provisions either by (i) restating prior financial statements as
      if
      the “dual approach” had always been used or (ii) recording the cumulative effect
      of initially applying the “dual approach” as adjustments to the carrying value
      of assets and liabilities as of January 1, 2006 with an offsetting adjustment
      recorded to the opening balance of retained earnings. Use of the “cumulative
      effect” transition method requires detailed disclosure of the nature and amount
      of each individual error being corrected through the cumulative adjustment
      and
      how and when it arose. The adoption of SAB No. 108 did not have a material
      impact on the Company’s consolidated financial statements.


-31-


In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN No. 48”). This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in a company’s financial statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” This interpretation seeks to reduce the diversity
      in practice associated with certain aspects of measurement and recognition
      in
      accounting for income taxes. In addition, it requires expanded disclosure with
      respect to the uncertainty in income taxes. FIN No. 48 is effective for annual
      periods after December 15, 2006, which for the Company its fiscal year beginning
      March 1, 2007. The Company has not evaluated the potential impact to the
      consolidated financial statements, but believes its impact if any, will not
      be
      material to the consolidated financial statements.




**2—Property
      and Equipment**




Net
      property and equipment consisted of the following at the end of February:




**2007**
            
            **2006**Land
            
            $
            311
            
            $
            311Building
                and leasehold improvements
            
            
            5,071
            
            
            4,519Furniture
                and fixtures
            
            
            432
            
            
            356Vehicles
            
            
            922
            
            
            926Warehouse
                and office equipment
            
            
            6,450
            
            
            5,57513,186
            
            
            11,687Less:
                accumulated depreciation and amortization
            
            
            (7,539
            )
            
            (6,843
            )Net
                property and equipment
            
            $
            5,647
            
            $
            4,844




Capitalized
      lease assets of $925 and $806, together with accumulated amortization of $208
      and $303, are included in net property and equipment as of February 28,
      2007 and 2006.




**3—Accrued
      Expenses and Other Current Liabilities**




Accrued
      expenses and other current liabilities consisted of the following at the end
      of
      February:




**2007**
            
            **2006**Bonuses
                and commissions
            
            $
            2,321
            
            $
            1,433Vacation
            
            
            558
            
            
            499Taxes,
                other than income taxes
            
            
            966
            
            
            893Self-insurance
                reserves
            
            
            1,163
            
            
            702Professional
                fees
            
            
            101
            
            
            97Customer
                deposit
            
            
            101
            
            
            488Deferred
                rent
            
            
            234
            
            
            171Other
            
            
            487
            
            
            314$
            5,931
            
            $
            4,597




**4—Debt**




Debt
      is
      summarized as follows at the end of February:




**2007**
            
            **2006**Borrowings
                under revolving credit agreement
            
            $
            24,361
            
            $
            22,940Other
                long-term debt:Capital
                expenditure facility
            
            
            624
            
            
            704Note
                payable to sellers of real property
            
            
            683
            
            
            710Other
            
            
            38
            
            
            58Total
                other long-term debt
            
            
            1,345
            
            
            1,47225,706
            
            
            24,412Less
                current maturities
            
            
            (131
            )
            
            (128
            )Long-term
                debt, less current maturities
            
            $
            25,575
            
            $
            24,284


-32-




In
      fiscal
      2007, the Company amended its credit arrangement (“Agreement”) with a commercial
      bank to expand its revolving credit facility from $35 million to $45 million
      and
      to extend the maturity date of the agreement by one year to August 31, 2008.
      All
      other material terms of the credit arrangement were unchanged. Under the
      arrangement, the Company also has a $5 million credit line that may be used
      for
      capital expenditures or to purchase real estate. The amount that may be borrowed
      under the revolving credit facility is limited to a borrowing base consisting
      of
      85% of eligible accounts receivable, and from 50% to 65% of eligible inventory,
      depending on the time of year. At February 28, 2007, the Company’s
      available credit under the revolving credit line was $11.2 million.




As
      of
      February 28, 2007, the Company had outstanding borrowings of $24,361 on the
      revolving line of credit and $624 under the capital expenditure facility. In
      addition, the Company had an outstanding letter of credit for $926 against
      the
      line of credit. Borrowings under the capital expenditure facility are repaid
      in
      equal monthly principal installments of $7, plus interest. Borrowings under
      both
      facilities bear interest based on the prime rate or LIBOR, plus a spread that
      is
      dependent on the Company’s financial performance. As of February 28, 2007,
      the applicable interest rate on both facilities was either the prime rate or
      LIBOR plus 1.375%, and the Company had elected the LIBOR option (5.375% at
      February 28, 2007) for all amounts outstanding under the facilities. A
      commitment fee of 0.25% is paid on the unused portion of the revolving credit
      line. The line of credit is secured by the Company’s accounts receivable and
      inventory.




The
      Agreement contains customary loan covenants with respect to the Company’s net
      worth, fixed charge coverage, leverage ratio, and ratio of funded debt to
      earnings before interest, income tax, depreciation, amortization and non-cash
      compensation expense. The Agreement also contains various affirmative and
      negative covenants unrelated to the Company’s financial performance, including a
      prohibition on payment of dividends. Failure to comply with any financial or
      non-financial covenant, if not promptly cured, constitutes an event of default
      under the Agreement. Certain other specified events and any material adverse
      change, as determined by the bank, also constitute an event of default. The
      existence of an event of default gives the bank a right to accelerate all
      outstanding indebtedness under the Agreement. As of February 28, 2007, the
      Company was in compliance with all of the required financial and non-financial
      covenants.




The
      Agreement does not require the Company to use lockbox or similar arrangements
      pursuant to which the bank would exercise control over collection proceeds
      and
      the discretion to reduce indebtedness under the Agreement. If an Event of
      Default exists, the bank may offset against the Company’s indebtedness all funds
      of the Company that are held in accounts at the bank. The Company is not
      required to maintain deposit balances at the bank, although the Company has
      elected to utilize the bank’s treasury management services.




In
      2000,
      the Company purchased real estate in Gainesville, Florida that is occupied
      as a
      branch operation for approximately $957. Of the purchase price, the sellers
      financed $825 for a term of 25 years at an interest rate of 8.25% per
      annum. The note is secured by a deed of trust on the real estate and all
      improvements. As of February 28, 2007 and 2006, the note payable balance
      was $683 and $710, respectively.




Based
      upon the borrowing rates currently available to the Company for debt instruments
      with similar terms and average maturities, the carrying value of long-term
      debt
      approximates fair value.




Future
      maturities of debt are as follows:




**Year:**
            2008
            2009
            2010
            2011
            2012
            Thereafter$131
            $24,952
            $36
            $37
            $37
            $513


-33-




**5—Lease
      Commitments**




The
      Company leases warehouse equipment, office equipment and vehicles under capital
      leases. As of February 28, 2007 future minimum lease payments under capital
      leases are as follows:




**Year
                ended February 28,**
            
            **Capital lease**
              **payments**2008
            
            $
            1902009
            
            
            1802010
            
            
            1642011
            
            
            1252012
            
            
            34Total
                minimum lease payments
            
            
            693Less
                amounts representing interest
            
            
            (121
            )Present
                value of future minimum lease payments
            
            
            572Less
                current maturities of capital lease obligations
            
            
            (160
            )Long-term
                obligations under capital leases
            
            $
            412




Additionally,
      the Company leases its corporate offices, office and warehouse space occupied
      by
      its HVAC operations, office equipment and various vehicles under non-cancelable
      operating lease agreements that expire at various dates through 2017. The leases
      for its branch facilities often require that the Company pay the taxes,
      insurance and maintenance expenses related to the leased properties. Certain
      of
      the Company’s lease agreements include renewal and/or purchase
      options.




**Future
      minimum lease payments under such leases are as follows:**







**Year:**
            2008
            2009
            2010
            2011
            2012
            Thereafter**Lease Payments**
            $6,729
            $5,819
            $5,228
            $3,905
            $2,445
            $3,106




Rental
      expenses were $7,931, $6,531 and $5,149 in 2007, 2006 and 2005, respectively.




-34-


**6—Income
      Taxes**




Federal
      and state income tax provisions (benefits) are as follows:




**Year
                Ended February 28,****2007**
            
            **2006**
            
            **2005**FederalCurrent
            
            $
            3,440
            
            $
            1,285
            
            $
            2,476Deferred
            
            
            (418
            )
            
            198
            
            
            (104
            )StateCurrent
            
            
            520
            
            
            292
            
            
            233Deferred
            
            
            2
            
            
            29
            
            
            (17
            )$
            3,544
            
            $
            1,804
            
            $
            2,588




The
      difference between the income tax provisions (benefits) computed at the
      statutory federal income tax rate and the financial statement provision for
      taxes is summarized below:





**Year
                Ended February 28,****2007**
            
            **2006**
            
            **2005**U.S.
                tax at statutory rate
            
            $
            3,157
            
            $
            1,550
            
            $
            2,312State
                income tax, net of federal benefit
            
            
            309
            
            
            212
            
            
            258Increase
                (reduction) in tax expenseresulting
                from:Change
                in valuation allowance
            
            
            —
            
            
            —
            
            
            (115
            )Nondeductible
                expenses
            
            
            82
            
            
            92
            
            
            78Other
                provision adjustments
            
            
            (4
            )
            
            (50
            )
            
            55Income
                tax provision
            
            $
            3,544
            
            $
            1,804
            
            $
            2,588




The
      Company is required to establish a valuation allowance for deferred tax assets
      if, based on the weight of available evidence, it is more likely than not that
      some portion or all of the deferred tax assets will not be realized. The
      ultimate realization of deferred tax assets is dependent upon the generation
      of
      future taxable income during the periods in which those temporary differences
      become deductible. Management considers both the projected future taxable income
      and tax planning strategies in making this assessment. Based upon the level
      of
      historical taxable income and projections for future taxable income in the
      periods which the deferred tax assets are deductible, management believes that
      a
      valuation allowance is not required, as it is more likely than not that the
      results of future operations will generate sufficient taxable income to realize
      the deferred tax assets.




Significant
      components of our net deferred tax assets, net of deferred tax liabilities,
      at
      February 28 were as follows:





**2007**
            
            **2006**Current
                deferred tax assets:Section 263A
                capitalization
            
            $
            802
            
            $
            701Allowance
                for doubtful accounts
            
            
            467
            
            
            226Accrued
                vacation
            
            
            218
            
            
            196Inventory
                reserves
            
            
            165
            
            
            215Total
                current deferred tax assets
            
            $
            1,652
            
            $
            1,338Long-term
                deferred tax assets (liabilities):Fixed
                asset depreciation
            
            $
            289
            
            $
            219Interest
                rate derivative
            
            
            55
            
            
            (101
            )Restricted
                stock expense
            
            
            175
            
            
            139State
                NOL carryforwards
            
            
            77
            
            
            79Goodwill
                and other amortization
            
            
            (780
            )
            
            (676
            )Total
                net long-term deferred tax liabilities
            
            
            (184
            )
            
            (340
            )Net
                deferred tax assets
            
            $
            1,468
            
            $
            998




The
      state
      net operating loss carryovers included in long-term deferred tax asset, begin
      to
      expire in 2010.


-35-


**7-
      Stock Based Compensation**





Restricted
      Stock Awards





Effective
      March 1, 2004, the Chief Financial Officer and the General Counsel of the
      Company entered into employment contracts that each provide for the contingent
      issuance of 500,000 shares of restricted stock upon continuation of employment
      for six years. Under the agreements, the restricted stock vests annually
      pro-rata over such period. Compensation expense recognized under the agreements
      was $358 in each of fiscal years 2007, 2006 and 2005.





Effective
      March 1, 2004, two of the outside directors of the Company each received
      restricted stock grants of 42,000 shares, subject to continuation of service
      as
      a director for four years. Additionally, effective August 18, 2005, another
      outside director of the Company received 25,000 shares, subject to continuation
      of service as a director for four years. Such shares vest annually pro-rata
      over
      such periods. For fiscal years ended February 28, 2007, 2006 and 2005 the
      Company recognized $47, $39 and $30, respectively, as compensation expense
      related to the director’s restricted stock grants.





Effective
      June 1, 2005, the Company issued 25,000 shares of restricted stock to a
      non-officer, subject to continuation of employment for five years. Additionally,
      effective April 15, 2006, the Company issued 135,000 shares to non-officer
      employees, subject to continuation of employment for five years. Such shares
      vest annually pro-rata over such periods. For fiscal year ended February 28,
      2007 and 2006 the Company recognized $107 and $11, respectively, as compensation
      expense related to such restricted stock grants.





In
      fiscal
      2007, the Company acquired shares of the Company’s stock in connection with
      employee restricted stock grants, whereby Company shares were tendered by
      employees for the payment of applicable statutory withholding taxes at the
      date
      of vesting. For the fiscal year ended February 28, 2007, 45,716 shares were
      acquired at a cost of $163. No shares were acquired in the fiscal years ended
      February 28, 2006 and 2005. The Company subsequently retired such shares
      acquired.





Stock
      Options





The
      Company had a stock option plan for key employees and directors of the Company
      and its subsidiaries. The plan provided for the granting of up to 500,000
      non-qualified and/or incentive stock options. The options expired after five
      years and could be extended for a period of up to five years. There were 23,500
      options exercised in March 2006. All of the remaining unexercised options
      expired in the same month. The stock option plan expired in the quarter ending
      August 31, 2006 and the Company has elected to discontinue using stock options
      as a form of compensation.




A
      summary
      of the Company’s stock option activity and related information follows:






**Year
                Ended February 28,****2007**
            
            **2006**
            
            **2005****Options**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Options**
            
            **Weighted**
              **Average
                Exercise**
              **Price**Outstanding—Beginning
                of year
            
            
            52,000
            
            $
            1.50
            
            
            225,500
            
            $
            1.26
            
            
            272,500
            
            $
            1.25Granted
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            (23,500
            )
            
            1.50
            
            
            (146,000
            )
            
            1.18
            
            
            (39,000
            )
            
            1.18Forfeited
            
            
            (28,500
            )
            
            1.25
            
            
            (27,500
            )
            
            1.25
            
            
            (8,000
            )
            
            1.26Outstanding—End
                of year
            
            
            —
            
            
            —
            
            
            52,000
            
            
            1.50
            
            
            225,500
            
            
            1.26Exercisable—End
                of year
            
            
            —
            
            
            —
            
            
            52,000
            
            
            1.50
            
            
            225,500
            
            
            1.26




-36-


**8—Profit
      Sharing Plan**




The
      Company has a qualified profit sharing plan (“Plan”) under Section 401(k)
      of the Internal Revenue Code. The Plan is open to all eligible employees. The
      Company matches 50% of the participant’s contributions, not to exceed 3% of each
      participant’s compensation. Company contributions to the Plan were $377, $314
      and $289 for fiscal 2007, 2006 and 2005 respectively.




**9—Earnings per
      Share**




Basic
      earnings per share of common stock is computed by dividing net income by the
      weighted-average number of shares outstanding, including the vested restricted
      shares. Diluted earnings per share is obtained by dividing net income by the
      weighted average outstanding shares adjusted for the dilutive effects of
      outstanding stock options and unvested shares of restricted stock using the
      treasury stock method. All of the Company’s outstanding stock options are
      included in the diluted earnings per share calculation.




The
      following summarizes the common shares used to calculate earnings per share
      of
      common stock, including the potentially dilutive impact of stock options and
      restricted shares, using the treasury stock method:




**Year
                ended February 28,****2007**
            
            **2006**
            
            **2005**Denominator
                for basic earnings per share-weighted average shares
            
            
            11,225,526
            
            
            11,006,175
            
            
            10,696,398Effect
                of dilutive securities:Employee
                stock options
            
            
            —
            
            
            26,920
            
            
            101,190Restricted
                stock grants
            
            
            399,542
            
            
            327,188
            
            
            230,460Denominator
                for diluted earnings per share—adjusted weighted average shares and
                assumed conversions
            
            
            11,625,068
            
            
            11,360,283
            
            
            11,028,048




**10—Legal
      Proceedings**




We
      are
      subject to various legal proceedings arising in the ordinary course of business.
      We vigorously defend all matters in which the Company or its business units
      are
      named defendants and, for insurable losses, maintain significant levels of
      insurance to protect against adverse judgments, claims or assessments. Although
      the adequacy of existing insurance coverage or the outcome of any legal
      proceedings cannot be predicted with certainty, we do not believe the ultimate
      liability associated with any claims or litigation will have a material impact
      to our financial condition or results of operations.




**11—Summarized
      Quarterly Data (Unaudited)**




The
      following is a summary of the unaudited results of operations for each quarter
      in fiscal years 2007 and 2006:




**Quarter****First**
            
            **Second**
            
            **Third**
            
            **Fourth**Fiscal
                year ended February 28, 2007Sales
            
            $
            61,924
            
            $
            76,143
            
            $
            56,014
            
            $
            45,562Gross
                profit
            
            
            15,255
            
            
            19,915
            
            
            14,229
            
            
            11,637Net
                income (loss)
            
            
            1,684
            
            
            3,365
            
            
            919
            
            
            (226
            )Basic
            
            $
            .15
            
            $
            .30
            
            $
            .08
            
            $
            (.02
            )Diluted
            
            $
            .15
            
            $
            .29
            
            $
            .08
            
            $
            (.02
            )Fiscal
                year ended February 28, 2006Sales
            
            $
            47,538
            
            $
            61,140
            
            $
            50,013
            
            $
            45,621Gross
                profit
            
            
            11,115
            
            
            14,351
            
            
            11,805
            
            
            11,060Net
                income
            
            
            160
            
            
            1,856
            
            
            654
            
            
            84Basic
            
            $
            .01
            
            $
            .17
            
            $
            .06
            
            $
            .01Diluted
            
            $
            .01
            
            $
            .17
            
            $
            .06
            
            $
            .01




Quarterly
      earnings per common share amounts may not add up to the fiscal year amounts
      due
      to rounding.


-37-




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




None.




**Item 9A.
      Controls and Procedures.**




The
      Company performed an evaluation of the disclosure controls and procedures (as
      defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934
      (the “Exchange Act”) as of February 28, 2007. This evaluation was performed
      under the supervision and with the participation of the Company’s management,
      including the Chief Executive Officer and Chief Financial Officer. Based upon
      that evaluation, the Chief Executive Officer and Chief Financial Officer have
      concluded that these disclosure controls and procedures are effective in
      producing the timely recording, processing, summarizing and reporting of
      information and in accumulating and communicating of information to management
      as appropriate to allow for timely decisions with regard to required disclosure.




No
      changes were made to the Company’s internal controls over financial reporting
      during the last fiscal quarter that materially affected, or are reasonably
      likely to materially affect, the Company’s internal controls over financial
      reporting.




**PART
      III**




This
      part
      of Form 10-K, which includes Items 10 through 14, is omitted because the Company
      will file definitive proxy material pursuant to Regulation 14A not more than
      120
      days after February 28, 2007, including the information required by Items 10
      through 14, which is incorporated herein by reference.




**PART
      IV**




**Item 15.
      Exhibits, Financial Statement Schedules, and Reports
      on Form 8-K.**




(a)(1)
      Financial Statements included in Item 8.




See
      Index
      to Financial Statements of ACR Group, Inc. set forth in Item 8, Financial
      Statements and Supplementary Data.




(a)(2)
      Index to Financial Statement Schedules included in Item 15.




The
      following financial statement schedule for the years ended February 28, 2007,
      2006 and 2005 is included in this report:




Schedule
      II - Valuation and Qualifying Accounts




All
      other
      schedules are omitted because they are not applicable or the required
      information is included in the financial statements or notes thereto.




(a)(3)
      Exhibits




The
      following exhibits are filed with or incorporated by reference into this report.
      The exhibits which are denoted by an asterisk (*) were previously filed as
      a part of, and are hereby incorporated by reference from, either (a) Annual
      Report on Form 10-K for fiscal year ended June 30, 1991 (referred to as
“1991 10-K”), or (b) Annual Report on Form 10-K for fiscal year ended
      February 28, 1993 (referred to as “1993 10-K”), or (c) Annual Report
      on Form 10-K for fiscal year ended February 28, 1998 (referred to as “1998
      10-K”), or (d)Annual Report on Form 10-K for fiscal year ended February 29,
      2004 (referred to as “2004 10-K”) or (e) Quarterly Report on Form 10-Q for
      the quarter ended August 31, 2004 (referred to as “August 31, 2004 10-Q”)
      or (f) Current Report on Form 8-K filed on September 22, 2005
      (referred to as “September 22, 2005 8-K”),(g) Current Report on Form 8-K filed
      on June 20, 2006 (referred to as “June 20, 2006 8-K”), or (h) current report on
      Form 8-K filed on September 18, 2006 (referred to as “September 18, 2006
      8-K”).




-38-





Exhibit
              Number
            
            Description*3.1
            
            Restated
                Articles of Incorporation (Exhibit 3.1 to 1991 10-K)*3.2
            
            Articles
                of Amendment to Articles of Incorporation (Exhibit 3.2 to 1993
                10-K)*3.3
            
            Amended
                and Restated Bylaws (Exhibit 3.2 to 1991 10-K)*3.4
            
            Amendment
                to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993
                10-K)*4.1
            
            Specimen
                of Common Stock Certificate of ACR Group, Inc. (Exhibit 4.1 to 1993
                10-K)*10.1
            
            Employment
                Agreement between the Company and Alex Trevino, Jr. dated as of March
                1,
                1998 (Exhibit 10.1 to 1998 10-K)*10.2
            
            Employment
                Agreement between the Company and Anthony R. Maresca dated as of
                March 1,
                2004 (Exhibit 10.3A to 2004 10-K)*10.2A
            
            Amendment
                to Exhibit “A” of the Employment Agreement between the Company and Anthony
                R. Maresca effective as of March 1, 2004. (Exhibit 10.3B to August
                31,
                2004 10-Q)*10.3
            
            Employment
                Agreement between the Company and A. Stephen Trevino dated as of
                March 1,
                2004. (Exhibit 10.19 to 2004 10-K)*10.3A
            
            Amendment
                to Exhibit “A” of the Employment Agreement between the Company and A.
                Stephen Trevino effective as of March 1, 2004. (Exhibit 10.18A to
                August
                31, 2004 10-Q)*10.4
            
            Credit
                Agreement between the Company and Wells Fargo Bank, N.A. dated
                September 7, 2004. (Exhibit 10.20 to August 31, 2004
                10-Q)*10.5
            
            Amendment
                to Credit Agreement dated as of August 31, 2005 between the Company
                and
                Wells Fargo Bank, N.A. (Exhibit 10.1 to September 22, 2005
                8-K)*10.6
            
            Second
                Amendment to Credit Agreement dated June 14, 2006, by and among ACR
                Group,
                Inc. and Wells Fargo Bank, N.A. (Exhibit 10.1 to June 20, 2006
                8-K)*10.6A
            
            Third
                Amendment to Credit Agreement by and among ACR Group, Inc. and Wells
                Fargo
                Bank N.A. effective as of September 13, 2006. (Exhibit 10.1 to September
                18, 2006 8-K)*10.7
            
            1996
                Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS
                333-16325)*10.8
            
            Director
                Restricted Stock Agreement between the Company and Roland H. St.
                Cyr dated
                as of March 1, 2004. (Exhibit 10.17 to 2004 10-K)*10.9
            
            Director
                Restricted Stock Agreement between the Company and Alan D. Feinsilver
                dated as of March 1, 2004. (Exhibit 10.18 to 2004 10-K)*10.10
            
            Director
                Restricted Stock Agreement between the Company and Thomas J. Reno
                dated as
                of October 26, 2005 (Exhibit 10.10 to 2006 10-K)21.1
            
            Subsidiaries
                of the Company23.1
            
            Consent
                of Independent Registered Public Accounting Firm31.1
            
            Certificate
                of the Chief Executive Officer pursuant to Securities Exchange Act
                Rules
                13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            
            Certificate
                of the Chief Financial Officer pursuant to Securities Exchange Act
                Rules
                13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            
            Certification
                from the Chief Executive Officer of ACR Group, Inc. pursuant to 18
                U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002.32.2
            
            Certification
                from the Chief Financial Officer of ACR Group, Inc. pursuant to 18
                U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002.




-39-




(b)
      Reports on Form 8-K.




None.




(c)
      Exhibits




See
      Item 15(a)(3), above.


-40-




**SCHEDULE
      II**




**ACR
      GROUP, INC. AND SUBSIDIARIES**




**SCHEDULE
      OF VALUATION AND QUALIFYING ACCOUNTS**




**(in
      thousands)**






**Description**
            
            **Balance
                at beginning of period**
            
            **Charged
                to costs and expenses**
            
            **Write-offs**
            
            **Balance
                at end of period****Year
                ended February 28, 2007:**Allowance
                for doubtful accounts
            
            $
            906
            
            $
            799
            
            $
            615
            
            $
            1,090Inventory
                reserves
            
            
            548
            
            
            506
            
            
            634
            
            
            420**Year
                ended February 28, 2006:**Allowance
                for doubtful accounts
            
            
            918
            
            
            735
            
            
            747
            
            
            906Inventory
                reserves
            
            
            370
            
            
            596
            
            
            418
            
            
            548**Year
                ended February 28, 2005:**Allowance
                for doubtful accounts
            
            
            793
            
            
            557
            
            
            432
            
            
            918Inventory
                reserves
            
            
            164
            
            
            351
            
            
            145
            
            
            370


-41-




**SIGNATURES**






Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.




ACR
                    GROUP, INC.Date:
                    May 30, 2007
                By:
                /S/    ANTHONY
                    R. MARESCA**Anthony
                    R. Maresca**
                  **Senior
                    Vice President and**
                  **Chief
                    Financial
                    Officer**




Pursuant
      to the requirement 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 and on the dates indicated.




**Signature**/S/    ALEXTREVINO,
                  JR.
                
                
                **Alex
                  Trevino, Jr.**
              Chairman
                  of the Board, President and Chief Executive Officer
                
                
                (Principal
                  executive officer)
              May
                  30, 2007/S/    ANTHONYR.
                  MARESCA
                
                
                **Anthony
                  R. Maresca**
              Senior
                  Vice President, Chief Financial Officer and Director
                
                
                (Principal
                  financial and accounting officer)
              May
                  30, 2007/S/    A.
                  STEPHENTREVINO
                
                
                **A.
                  Stephen Trevino**
              Senior
                  Vice President, General Counsel and Director
              May
                  30, 2007/S/    ALAND.
                  FEINSILVER
                
                
                **Alan
                  D. Feinsilver**
              Director
              May
                  30, 2007/S/    ROLANDH.
                  ST.
                  CYR
                
                
                **Roland
                  H. St. Cyr**
              Director
              May
                  30, 2007/S/    THOMASJ.
                  RENO
                
                
                **Thomas
                  J. Reno**
              Director
              May
                  30, 2007/S/    MARSHALLG.
                  WEBB
                
                
                **Marshall
                  G. Webb**
              Director
              May
                  30, 2007/S/    JOE.
                  SHAW,
                  JR.
                
                
                **Jo
                  E. Shaw, Jr.**
              Director
              May
                  30, 2007






-42-