**UNITED STATES OF AMERICA**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

 (Mark One)

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

 

**For the fiscal year ended December 31, 2007**

 

Or

 

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

 

For the transition period from ________________________ to ______________________

| Commission File Number | **000-51372** |
|------------------------|---------------|

 

**Omega Flex, Inc.**

(Exact name of registrant as specified in its charter)

 

|                                     |                |
|------------------------------------------|---------------------|
| **Pennsylvania**                         | **23-1948942**      |
| (State or other jurisdiction of          | (I.R.S. Employer    |
| incorporation or organization)           | Identification No.) |
|                                     |                |
| **451 Creamery Way, Exton, PA**          | **19341**           |
| (Address of principal executive offices) | (Zip Code)          |

 

| Registrant’s telephone number, including area code | **610-524-7272** |
|---------------------------------------------------------|------------------|

 

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

 

|   | Title of each class | Name of each exchange on which registered |
|--------|---------------------|-------------------------------------------|

|   | **Common** | **The NASDAQ Stock Market LLC** |
|--------|------------|---------------------------------|

 

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

 

**Not applicable**

(Title of class)

 

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

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                                         Yes  xNo [    ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                         x

 

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

 

| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company | x |
|---------------------------|---------------------|-------------------------|---------------------------|---|

 

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

 

The aggregate market value of voting and non-voting common shares held by non-affiliates of the registrant as of June 30, 2007, the last business day of the most recently completed second quarter of 2007 was $61,316,409.  

 

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**APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS**

**DURING THE PRECEDING FIVE YEARS:**

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.                 Yes  [   ]No [    ]

 

The number of shares of the registrant’s common stock issued and outstanding as of March 28, 2008 was 10,108,287.

 

Portions of the registrant’s definitive proxy statement relating to the registrant’s 2007 Annual Meeting of Shareholders to be filed hereafter are incorporated by reference into Part III (Items 10-14) of this Report on Form 10-K and certain Exhibits to previous filings with the Securities and Exchange Commission are incorporated by reference into Part IV, Item 15 of this Report on Form 10-K.

 

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**PART I**

 

**Item 1 - BUSINESS**

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

*Certain statements in this Annual Report on Form 10-K that are not historical facts -- but rather reflect our current expectations concerning future results and events -- constitute forward-looking statements. The words “believes,” “expects,” “intends,” “plans,” “anticipates,” “intend,” “estimate,” “potential,” “continue,” “hopes,” “likely,” “will,” and similar expressions, or the negative of these terms, identify such forward-looking statements.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements of Omega Flex, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements.*

 

*Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this annual report statement. We undertake no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.*

 

**GENERAL**

 

**DESCRIPTION OF OUR BUSINESS**

 

**Overview of the Company**

 

We are a leader in the manufacture and sale of flexible metal hose for applications in conveying various liquids and gases within a number of diverse industries, including construction, transportation, steel, pharmaceutical, and petrochemical.  The various product lines include corrugated metal hoses in a broad range of sizes and alloys, including three grades of stainless steel, bronze, Inconel and Hastelloy.  We also manufacture a wide range of pressure reinforcing braids for our hoses in both metallic and synthetic constructions.  These products are used in a wide variety of applications primarily for the processing industries, transportation industry, medical and semiconductor markets, and for instrumentation, as well as the construction industry.

 

**Industry Overview**

 

The flexible metal hose industry is highly fragmented and diverse, with over 10 companies producing flexible metal hose in the United States, and at least that many in Europe and Asia.  Because of its simple and ubiquitous nature, flexible metal hose can be applied and has been applied to a number of different applications across a broad range of industries.

 

The major market categories for flexible metallic hose include automotive, aerospace, residential and commercial construction, and general industrial. Omega Flex participates in the latter two, which in the aggregate represent about 50% of the total market opportunity for flexible metallic hose.  The major use of corrugated stainless steel tubing in the residential and commercial construction markets is primarily for flexible gas piping and gas appliance 

 

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connectors and secondarily as pump connectors and seismic loops to isolate vibration in mechanical piping systems in commercial buildings. The general industrial market includes all of the processing industries, the most important of which include primary steel, petrochemical, pharmaceutical, and specialty applications for transfer of fluids at both extremely low and high temperatures, (such as the conveying of cryogenic liquids) and a highly fragmented OEM market, as well as a maintenance and repair market.

 

None of our competitors is dominant in more than one market.  We are a leading supplier of flexible metal hose in each of the two broad markets in which we participate.  Our assessment of our overall competitive position is based on several factors.  The flexible gas piping market in the U.S. is currently concentrated in the residential housing market, and based on the reports issued by the national trade groups on housing construction, the level of acceptance of flexible gas piping in the construction market, and the average usage of flexible gas piping in a residential building, we are able to estimate with a high level of accuracy the size of the total gas piping market, and, based on our sales, our position within that market.  For other applications, industry trade groups collect and report on the size of the relevant market, and we can estimate our percentage of the relevant marketbased on our sales as compared to the market as a whole.

 

Furthermore, the customer base for the products that we sell is widely known, as is the identity of the manufacturers aligned with those customers.  Independent manufacturers’ sales representatives have good estimates and in many cases, factual information on the volume of purchases of customers in their territories.  Because there are gross differences in the market shares of many of the competing manufacturers, it is possible to reasonably assess shared positions.  Large national accounts also have a sense as to shared positions as well, because they have relationships with most of the competing manufacturers and will share opinions.  Lastly, the term “leading” implies a host of factors other than sales volume and market share position. This includes the range and capability of the product line, history of product development and new product launches, all of whichinformation is in public domain. Based on this alone, we are without question the undisputed leader in at least one of the two major market segments in which we participate.

 

**Development of Business**

 

We were incorporated in 1976 under the name of Tofle America, Inc. as the subsidiary of a Japanese manufacturer of flexible metal hose. For a number of years, we were a manufacturer of flexible metal hose that was sold primarily to customers using the hose for incorporation into finished assemblies for industrial applications.  We later changed our name to Omega Flex, Inc., and in 1996, we were acquired by Mestek, Inc. In 1997, we introduced our first new product – TracPipe® corrugated stainless steel tubing for use in carrying fuel gas within residential, commercial and industrial buildings. Our growth since 1997 has been primarily as a result of the growth in the use and acceptance of corrugated stainless steel tubing as an alternative to the traditional black iron pipe throughout the construction industry, and through the development of our AutoFlare®patented fittings and accessories to the corrugated stainless steel tubing that differentiate our systems from those of our competitors.  In 2004, we introduced a brand of corrugated stainless steel tubing under the registered trademark CounterStrike®  that is designed to be more resistant to damage caused by transient arcing of electrical energy.  In 2007, we introduced a new version of CounterStrike®  CSST that is 6 times more effective than the original version.  In January 2005, Mestek announced its intention to distribute its equity ownership in our common stock to the Mestek shareholders.  A registration statement for the Omega Flex 

 

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common stock was filed with the Securities and Exchange Commission and the registration statement was declared effective on July 22, 2005.  We also listed our common stock on NASDAQ National Market (now the NASDAQ Global Market) under the stock symbol “OFLX”, and began public trading of our common stock on August 1, 2005.  All Mestek shareholders as of the record date for the distribution received one share of Omega Flex common stock for each share of Mestek common stock owned as of the record date.  We are now a totally separate company from Mestek, and we do not use or share any material assets or service of Mestek in conducting our business.  Our operating plans for 2008 are to continue to grow the distribution and sale of our TracPipe® flexible gas piping and industrial products, as well as to nurture new product development.

 

**Overview of Current Business**

 

***Products***

 

We have had the most success within the residential construction industry where our TracPipe® and CounterStrike® flexible gas piping have enjoyed wide acceptance due to their reliability and durability.  Within that industry, the flexible gas piping products that we offer and similar products offered by our competitors have sought to overcome the use of black iron pipe that has traditionally been used by the construction industry in the United States and Canada for the piping of fuel gases within a building.  Prior to the introduction of the first corrugated stainless steel piping system in 1989, nearly all construction in the United States and Canada used traditional black iron pipe for gas piping.  However, the advantages of corrugated stainless steel tubing in areas subject to high incidence and likelihood of seismic events had been first demonstrated inJapan.  In a seismic event, the corrugated stainless steel tubing was shown to withstand the stresses on a piping system created by the shifting and movement of a seismic event better than rigid pipe.  However, the advantages of corrugated stainless steel tubing over the traditional black iron pipe also include lower overall installation costs because the corrugated stainless steel tubing can be installed in long uninterrupted lines within the building.

 

The flexibility of the tube allows it to be bent by hand without any tools when a change in direction in the line is required.  In contrast, black iron pipe requires that each bend in the pipe have a separate fitting attached.  This requires the installer to thread the ends of the black iron pipe, apply an adhesive to the threads, and then screw on the fitting, all of which is labor intensive and costly, including testing and rework if the work is not done properly.  As a result of these advantages, corrugated stainless steel tubing now commands slightly over one-half of the market for fuel gas piping in new and remodeled residential construction in the United States, and the use of rigid iron pipe and to a lesser degree copper tube, accounts for the remainder of the market. 

 

From its introduction in 1997, TracPipe® flexible gas piping has grown to be our primary product line, with other applications representing a minor portion of our business.  While we remain firmly committed to maintaining a presence in the other applications and markets for flexible metal hose (both because of the opportunities in those applications and because they suggest new markets and new applications), we have increasingly become an organization oriented to the manufacture and distribution of flexible gas piping products.  The growth in the flexible gas piping application domestically has superseded the prior technologies represented by traditional black iron pipe or copper tube.  We plan to continue our growth through continued inroads against older technologies, in both the residential and commercial markets, in the United States and overseas in geographic areas thathave access to natural gas distribution systems.

 

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In 2004, we introduced a new brand of flexible gas piping sold under the registered trademark “CounterStrike®”.  CounterStrike® is designed to be more resistant to damage from transient electrical arcing.  This feature is particularly desirable in areas that are subject to high levels of lightning strikes, such as the Southeast, and the Ohio Valley.  In a lightning strike, the electrical energy of the lightning can energize all metal systems and components in a building.  This electrical energy in attempting to reach ground may arc between metal systems that have different electrical resistance, and arcing can cause damage to the metal systems.  In standard CSST systems, an electrical bond between the CSST and the building’s grounding electrode would address this issue, but lightning is an extremely powerful and unpredictable force.CounterStrike®  CSST is designed to be electrically conductive to disperse the energy of any electrical charge over the entire surface of the CounterStrike® line.  In 2007, we introduced a new version of CounterStrike® CSST that was tested to be 6 times more resistant to damage from electrical arcing than the original version, and between 50 to 400 times more effective than standard CSST products.  As a result of its robust performance, the new version of CounterStrike® has been warmly received in the market, and is a validation of our market leadership in the industry.

 

As noted below, our flexible metal hose is used in a wide variety of applications besides flexible gas piping.  Our involvement in these markets is important because just as the flexible gas piping applications have sprung from our expertise in manufacturing annular metal hose, so other applications may also evolve from our participation in the industry.  For example, we currently have several development projects underway in various stages for several new applications, including transportation, high purity gases, and underground pre-sleeved applications.  Our transportation products require some additional development and testing for the product to begin to reach its potential and begin full commercialization.  Our high purity gas and underground pre-sleeved applications are still in development.

 

Flexible metal hose is also used in a wide variety of industrial and processing applications where the unique characteristics of the flexible hose in terms of its flexibility, and its ability to absorb vibration and thermal expansion and contraction, has unique benefits over rigid piping.  For example, in certain pharmaceutical processing applications, the process of developing the specific pharmaceutical may require rapid freezing of various compounds through the use of liquefied gases, such as liquefied nitrogen, helium or Freon.  The use of flexible metal tubing is particularly appropriate in these types of applications.  Flexible metal hose can accommodate the thermal expansion caused by the liquefied gases carried by it through the hose, and the total length of the hose will not significantly vary.  In contrast, fixed or rigid metal pipe would expand and contract along its length asthe liquid gases passed through it, causing stresses on the pipe junctions that would over time fatigue and fail.  Alternatively, within certain industrial or commercial applications using steam, either as a heat source or in the industrial process itself, the pumps used to transfer the liquid or steam within the system are subject to varying degrees of vibration.  Flexible metal hoses can be used as connections between the pump and the intake of the fluids being transferred to eliminate the vibration effects of the pumps on the piping transfer system.

 

In late 2007, after several years of development and testing, we also unveiled our newest product, DoubleTrac® flexible underground petroleum piping, which is used for piping of automobile filling stations and other underground petroleum piping applications.  The DoubleTrac® piping is installed underground between the main storage tank and the dispensing pump.  The DoubleTrac® piping offers several benefits that are important to its customers; zero 

 

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permeability of the liquid fuel through the sidewall of the pipe, and ease of installation.  Currently, most underground petroleum piping in the United States uses rigid fiberglass pipe that requires fittings at junctions, changes in direction, or the end of the pipe sections.  The fiberglass pipe also has some permeability of fuel through the sidewall of the rigid pipe.  DoubleTrac® resolves both of these issues through the use of a double-wall flexible pipe that uses a primary interior layer of stainless steel that has a zero permeation level, together with a secondary outer barrier layer of durable plastic.  The DoubleTrac® pipe can be installed in long continuous lengths, eliminating the labor costs and delays associated with rigid pipe.  The DoubleTrac® pipe also has a system for continuous leak detection in the unlikely event the inner stainless steel layer isbreached.  DoubleTrac® has recently received all necessary product approvals from Underwriters Laboratories, and is fully compliant with the UL971 product standard.  We expect full commercialization of DoubleTrac® to begin in 2008.

 

***Manufacturing***

 

In each instance, whether the application is for corrugated stainless steel tubing for fuel gases, flexible metal hose for handling specialty chemicals or gases, flexible underground petroleum piping, or unique industrial applications requiring ability to withstand wide variations in temperature and vibration, all of our success rests on the metal hose made by Omega Flex.  Most of our flexible metal hoses range in diameter from 1/4” to 2” while certain applications require diameters of up to 14”.  All of our smaller diameter pipe (2” inner diameter and smaller) is made by a proprietary process that is known as the rotary process. The proprietary process that we use to manufacture our annular hose is the result of a long-term development effort begun in 1995. Through continuous improvement, we have over the years developed and fine-tuned the process so that we canmanufacture annular flexible metal hose on a high speed, continuous process. We believe that our own rotary process for manufacturing annular corrugated metal hose is the most cost efficient method in the industry, and that our rotary process provides us with a unique advantage in many of the industries in which we participate. As a result, we are able to provide our product on a demand basis. In 2007, we achieved a delivery performance to the scheduled ship date of over 96%.  The quick inventory turnover reduces our costs for in-process inventory, and further contributes to our gross margin levels.  We have also improved our productivity on an historical basis.

 

***Raw Materials***

 

We use various materials in the manufacture of our products, primarily stainless steel for our flexible metal hose and plastics for our jacketing material on TracPipe® and CounterStrike® flexible gas piping.  We also purchase all of our proprietary AutoFlare® brass fittings for use with the TracPipe® and CounterStrike® flexible gas piping.  Although we have multiple sources qualified for all of our major raw materials and components, we have historically used one or two sources of supply for such raw materials and components.  Our current orders for stainless steel and fittings are each placed with one or two suppliers.  If any one of these sources of supply were interrupted for any reason, then we would have to devote additional time and expense in obtaining the same volume of supply from our other qualifiedsources.  This potential transition, if it were to occur, could affect our operations and financial results during the period of such transition.  Commodities markets in general and stainless steel in particular has had significant upward price movement in 2007, resulting in increasing costs to manufacture products and, in some cases, a tightening supply.  Although somewhat relaxed in late 2007, we believe that with our purchase commitments for stainless steel, polyethylene and for our proprietary fittings, that 

 

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we have adequate sources of supply for these raw materials and components for 2008.  We have not had significant difficulty in obtaining the raw materials, component parts or finished goods from our suppliers in prior years.  We believe that constriction in the supply of stainless steel will continue until additional global capacity becomes available.  Continued volatility in the commodities marketplace and competitive conditions in the sale of our products may not allow us to pass along raw materials or component part price increases to our customers.

 

***Business Seasonality***

 

The demand for our TracPipe® and CounterStrike® flexible gas piping product may be affected by the construction industry’s demand, which generally may slacken in the winter months of each year due to cold and inclement weather.  Accordingly, sales growth is usually higher in the spring, summer and fall, while sales in the winter may be static or rise only modestly.  However, the effect of the winter weather may be offset by the increase in demand for flexible gas piping products in general as more contractors and installers choose to use flexible gas piping rather than black iron pipe.

 

***Customers***

 

We sell our products to customers scattered across a wide and diverse set of industries from construction to pharmaceutical with approximately 4,600 customers.  These sales channels include sales through independent sales representatives, distributors, original equipment manufacturers, direct sales, and sales through our website on the internet.  We utilize various distribution companies in the sale of our TracPipe® flexible gas piping, and these distribution customers in the aggregate represent a material portion of our business.  In particular, our customer,  Ferguson Enterprises, and its various branches, represents 19% of our net sales and 17% of our accounts receivable balance at December 31, 2007.  All of this business is done on a purchase order basis for immediate resale commitments or stocking, and there are no long-term purchase commitments.  In the event we were tolose an account, we would not expect any long-term reduction in our sales due to the broad end-user acceptance of our products.  We would anticipate that in the event of a loss of any one or more distributors, that after an initial transition period, the sale of our products would resume at or near their historical levels.  Furthermore, in the case of certain national distribution chains like Ferguson and other distributors, it is possible that there would continue to be purchasing activity from one or more regional or branch distribution customers.  We sell our products within North America, primarily in the United States and Canada, and we also sell our products internationally, primarily in Europe through our facility located in Banbury, England.  Our sales outside of North America represent approximately 12% of our total net sales, with most of the sales occurring in the United Kingdom and elsewhere in Europe.  We do not have a material portion of our long-lived assets locatedoutside of the United States, and due to its small size, the foreign operations do not carry any additional risk from being located outside of the United States.

 

***Distribution of Sales***

 

As mentioned previously, we sell our products primarily through independent outside sales organizations, including independent sales representatives, distributors, fabricating distributors, wholesalers, and OEMs.  We have a limited internal sales function that sells our products to key accounts, including OEMs and distributors of bulk hose.  We believe that within each geographic market in which the independent sales representative, distributor or wholesaler 

 

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is located that our outside sales organizations are the first or second most successful outside sales organization for the particular product line within that geographic area.

 

***Competition***

 

There are approximately ten manufacturers of flexible metal hose in the United States, and approximately that number in Europe, several in South America, and six to eight in Asia. The U. S. manufacturers include Titeflex Corporation, Parker Hannifin Corporation, Ward Manufacturing, Truflex, Microflex, U. S. Hose, Hose Master, and several smaller privately held companies.  No one manufacturer, as a general rule, participates in more than two of the major market categories as outlined above with most concentrating in just one.  We estimate that we hold a number one or number two share position in the two major market categories in which we participate.  In the flexible gas piping market, the U.S. market is currently concentrated in the residential housing market, and based on the reports issued by the national trade groups on housing construction, the level of acceptance of flexible gaspiping in the construction market, and the average usage of flexible gas piping in a residential building, we are able to estimate with a high level of accuracy the size of the total gas piping market, and based on our sales our position within that market.  For other applications, industry trade groups collect and report on the size of the relevant market, and we can estimate our percentage of the relevant market based on our sales as compared to the market as a whole.  The larger of our two markets, the construction industry, has seen a reduction in the number of housing starts in 2007.  As discussed elsewhere, black iron pipe or copper tube was historically used by all builders of commercial and residential buildings until the advent of flexible gas piping and changes in the relevant building codes.  Since that time, flexible gas piping has taken an increasing share of the total amount of fuel gas piping used in construction, until at present we estimate that flexible gas piping isslightly more than one-half of the market for the residential component, but significantly less for commercial.  Within the flexible gas piping market, we compete against five other manufacturers of flexible metal hose, including Titeflex, Parker Hannifin, and Wardflex.

 

In the industrial market, due to the number of applications in which flexible metal hose may be used, and the number of companies engaged in the manufacture and sale of flexible metal hose, the market is very fragmented, and we estimate that no one company has a predominant market share of the business over other competitors.  The general industrial markets within Europe are very mature and tend to offer opportunities which are interesting to us in niche markets or during periods in which a weak dollar increases the demand for our products on a competitive basis.  Such has been the case for several years and has created new relationships for us. Currently, we are not heavily engaged in the manufacture of flexible metal hose for the aerospace or automotive markets, but we continue to review opportunities in all markets for our products to determine appropriate applications that will providegrowth potential and high margins. In some cases, where the product offering is considered a commodity, price is the overriding competing factor.  In other cases, a proprietary product offering or superior performance will be the major factors with pricing being secondary and in some cases, a non-factor.  The majority of our sales are to distributors and wholesalers, and our relationships with these customers are on an arms-length basis in that neither we, nor the customers are so dependent on the other to yield any significant business advantage.  From our perspective, we are able to maintain a steady demand for our products due to the broad acceptance of our products by end users, regardless of which distributor or wholesaler sells the product.

 

 

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***Backlog***

 

Management does not believe that backlog figures are material to an understanding of our business because most products are shipped promptly after the receipt of orders.

 

***Intellectual Property***

 

We have a comprehensive portfolio of intellectual property, including approximately 149 patents issued in 31 countries around the world.  The patents cover (a) the AutoFlare® fittings used by the flexible gas piping to join the piping to a junction or assembly, (b) pre-sleeved corrugated stainless steel tubing for use in underground applications, (c) an electrically conductive jacket for flexible gas piping that we sell under the trademark CounterStrike®, and (d) a tubing containment system for our DoubleTrac® flexible underground petroleum piping.  Our AutoFlare® fitting is the leading fitting for use with flexible gas piping because it offers a metal-to-metal seal between the fitting and the tubing, and because of its robustness and ease of use. The metal-to-metal contact provides for a longer lasting and more reliable seal thanfittings which use gaskets or sealing compounds that can deteriorate over time.  In applications involving fuel gases in a building, the ability to maintain the seal and prevent the leaking of such gases over long periods of time is valued by our customers.  We also have received a patent for the composition of the polyethylene jacket used in our CounterStrike® flexible gas piping product, which has increased ability to dissipate electrical energy in the event of a nearby lightning strike. The tubing containment system of our DoubleTrac® flexible underground petroleum piping, which is also patented in the U.S. and in other countries, allows for the monitoring and collection of any liquids that may leak from the stainless steel containment layer.  The expiration dates for the several patents covering our AutoFlare® fittings will expire between 2016 and 2020 and the Counterstrike® patent will expire 2025.  We currently haveseveral patent applications pending in the United States and internationally covering improvements to our AutoFlare® fittings and our CounterStrike® polyethylene jacket.  Finally, and as mentioned above, our unique rotary process for manufacturing flexible metal hose has been developed over the last ten years, and constitutes a valuable trade secret.  In a recently concluded case, a Pennsylvania court has issued a ruling that confirms our proprietary rotary manufacturing process does constitute a “trade secret” under Pennsylvania law, and is entitled to protection against unauthorized disclosure or misappropriation.

 

We are currently engaged in a case currently pending in the U.S. District Court in Massachusetts, in which we have sued a flexible gas pipe competitor for infringement on one or more of our U.S. patents covering our AutoFlare® fittings.  The court has found that the defendants have infringed on our patent, and the case is scheduled for trial in May 2008 on the sole issue of the validity of our patent.  See “Item 3 – Legal Proceedings” for a more detailed description of the litigation.

 

***Employees***

 

As of December 31, 2007, we had 125 employees. Most of our employees are located in our main facility in Exton, Pennsylvania, which is currently our main manufacturing facility, and which contains our engineering, finance, human resources and most sales personnel.  Our factory workforce in Exton, Pennsylvania is not represented by a collective bargaining agent.  We also maintain an office in Middletown, Connecticut where six employees in management and sales are primarily assigned.  A number of individual sales personnel are scattered across the United 

 

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States. We also maintain a facility in Banbury, England.  The operation in England has a total of twelve people.  The sales personnel in England handle all sales and service for our products in Europe and select accounts in Asia and the Middle East.

 

***Environmental***

 

Our manufacturing processes do not require the use of significant quantities of hazardous substances or materials, and therefore we are able to operate our Exton facility as a “small quantity generator” under the Resource Conservation and Recovery Act, 42 U.S.C. §§ 321 *et seq.*As a result, compliance with federal, state and local environmental laws do not pose a material burden on our business, and we are not required to expend any material amounts on capital expenditures for environmental control facilities for our manufacturing facility.

 

***Internet Website***

 

You may learn more about our company by visiting our website at www.omegaflex.com.  Among other things, you can access our filings with the Securities and Exchange Commission.  These filings include annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K), as well as Section 16 reports filed by our officers and directors (Forms 3, 4 and 5).  All of these reports will be available on the website as soon as reasonably practicable after we file the reports with the SEC.  You may also view on our website the following important corporate governance documents:

 

|   | **•** | Code of Business Ethics |
|--------|------------|-------------------------|

|   | **•** | Corporate Governance Guidelines |
|--------|------------|---------------------------------|

|   | **•** | Charters for each of the Board committees |
|--------|------------|-------------------------------------------|

|   | **•** | Policy on receiving complaints regarding account or internal control issues |
|--------|------------|-----------------------------------------------------------------------------|

 

**Item 1B – UNRESOLVED STAFF COMMENTS**

 

We do not have any unresolved comments from the staff of the Securities and Exchange Commission.

 

**Item 2 - PROPERTIES**

 

Our main facility is located in Exton, Pennsylvania about one hour west of Philadelphia and contains about 83,000 square feet of manufacturing and office space.  We lease our Exton facility from Exton Ranch, Inc., our wholly-owned subsidiary.  We lease additional non-manufacturing space in Downingtown, Pennsylvania approximately 5 miles from the main plant. The majority of manufacturing of our flexible metal hose is done at the Exton facility.  The corporate office of Omega Flex, Inc. in Middletown, Connecticut is rented.  In the United Kingdom, we rent a facility in Banbury, which manufactures products and serves sales, warehousing and operational functions as well.

 

**Item 3 - LEGAL PROCEEDINGS**

 

The Company is not presently involved in any litigation that it believes could materially and adversely affect its financial condition or results of operations, except as described in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations-under the sub-caption “Commitments”.

 

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We were involved in a putative class action litigation filed in the Clark County Circuit Court, in Arkansas, alleging that our corrugated stainless steel tubing product, TracPipe® and similar products manufactured by several other manufacturers (also named as defendants in the case) was defective against potential damage caused by nearby lightning strikes.  On September 5, 2006, we entered into a Stipulation and Settlement Agreement with the Class Representatives and Class Counsel, to settle and resolve the allegations brought forth in the lawsuit.  We and the other defendants deny all of the allegations in the lawsuit, and deny any wrongdoing or legal liability, but agreed to settle this matter to avoid further cost and the uncertainty and risk of the outcome of further litigation.  A copy of the Settlement Agreement has been filed as an exhibit to the Current Report on Form8-K that we filed with the Securities and Exchange Commission on September 6, 2006, and is available on our website at www.omegaflex.com.  The court gave final approval to the Settlement Agreement on February 1, 2007.  The remedial program provided under the Settlement Agreement is currently processing claims from class members as provided under the Settlement Agreement.  The deadline for submitting such claims was September 5, 2007.

 

We are currently engaged in a patent infringement case in which we have sued a flexible gas pipe competitor for infringement on one or more of our U.S. patents covering our AutoFlare® fittings.  We have alleged that the competitor has infringed on one or more of our patents covering the AutoFlare® fittings by including certain patented features in the competitor’s fitting, including a locator sleeve that makes it easier to align the connection.  The trial court has ruled that the competitor did infringe on one or more of our AutoFlare® patents, and that the AutoFlare® patents are valid.  An appeals court reversed the trial court’s ruling on validity of our patent, and the case is scheduled for trial in May 2008 on the sole issue of whether our patent is valid under U.S. patent law.  If the patent is upheld as being valid,then the damages due to Omega Flex have been previously determined.

 

In another case that was pending in the Court of Common Pleas in Chester County, Pennsylvania, we sued a former employee and a flexible metal hose competitor to enjoin the disclosure of our trade secrets covering our proprietary rotary manufacturing process.  In this case, a former long-term employee left our company to work for a competitor who is engaged in the flexible metal hose market.  The former employee had been involved in the development and/or refinement of aspects of the rotary process manufacturing method, and had detailed knowledge of our trade secrets concerning this manufacturing method.  We filed suit to enjoin any disclosure of our trade secrets by the former employee to his new employer, to enforce certain terms of an employment agreement previously signed by the former employee, and to obtain damages for any unauthorized disclosure or misappropriation of our tradesecrets.  The case went to trial in March 2006, and the court issued its decision in July 2006, ruling that our proprietary rotary process for manufacturing corrugated stainless steel tubing was a “trade secret” under Pennsylvania law, and was to be accorded protection against unauthorized disclosure or misappropriation.  The defendants were permanently enjoined from disclosing the trade secrets, or using the trade secrets in their business.  At trial, we did not bring a claim for monetary damages, and no monetary damages were awarded by the court.

 

**Item 4 - SUBMISSION OF MATTER TO A VOTE OF THE SECURITY HOLDERS**

 

No matters were submitted to the security holders of the Company for a vote during the fourth quarter of 2007.

 

- 12 -

**PART II**

 

**Item 5 - MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Common Stock**

 

Our common stock is listed on the NASDAQ Global Market, under the symbol OFLX. The number of shareholders of record as of March 30, 2008, based on inquiries of the registrant’s transfer agent, was 809.  For this purpose, shareholders whose shares are held by brokers on behalf of such shareholders (shares held in “street name”) are not separately counted or included in that total.

 

The following table sets forth, for the periods indicated, the high and low closing sale prices for our common stock as reported by the NASDAQ Global Market.

 

**PRICE RANGE**

 

|           | **2007** |                      | **2006** |
|----------------|----------|---------------------------|----------|
|           | **high** | **low**    |     | **high** | **low**   |
|           |     |                      |     |   |   |
| First Quarter  | $23.32   | $20.23                    |     | $19.40 | $15.05 |
| Second Quarter | $22.64   | $18.91                    |     | $20.05 | $16.15 |
| Third Quarter  | $19.66   | $14.75                    |     | $25.43 | $19.00 |
| Fourth Quarter | $18.00   | $12.94                    |     | $23.30 | $18.27 |

 

We do not have any other securities, other than common stock, listed on a stock exchange or are publicly traded.

 

**Dividends**

 

We have declared two special dividends on our common stock between the period of 2006 and 2007. 

 

On December 11, 2006, the Board of Directors authorized a special dividend of $0.40 per share to all shareholders of record as of January 2, 2007, and payable as soon as practicable.  The payment in the amount of $4,061 was subsequently paid on January 16, 2007.  

 

On December 11, 2007, the Board authorized a special dividend of $0.70 per share to all Shareholders of record as of January 3, 2008, and subsequently paid on January 16, 2008 in the amount of $7,092.

 

Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant.

 

The Company adopted the Omega Flex, Inc. 2006 Phantom Stock Plan during 2006 as described in Note 13.  There are no plans to institute any other such plan at this time.

 

 

- 13 -

**Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*This report contains forward-looking statements, which are subject to inherent uncertainties.  These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments affecting environmental matters.  All of these are difficult to predict, and many are beyond the ability of the Company to control.*

 

*Certain statements in this Annual Report on Form 10-K that are not historical facts, but rather reflect the Company’s current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  The words “believes”, “expects”, “intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking statements.Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements.*

 

*Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Form 10-K.  The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.*

 

 

- 14 -

 

**OVERVIEW**

 

The Company is a leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries.  

 

The Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories.  The Company’s products are concentrated in residential and commercial construction, and general industrial markets. The Company’s primary product line, flexible gas piping, is used for gas piping within residential and commercial buildings.  Through its flexibility and ease of use with patented fittings distributed under the trademark, AutoFlare®, the TracPipe® and CounterStrike® flexible gas piping allows users to substantially cut the time required to install the gas piping, as compared to traditional methods.  Most of the Company’s products are manufactured at the Company’s Exton, Pennsylvania facility with a minor amount of manufacturing performed in the UK.  A majorityof the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both.  The Company has a broad distribution network in North America and to a lesser extent in other global markets.

 

 

**CHANGES IN FINANCIAL CONDITION**

**(All dollars in thousands)**

 

During 2007, the Company’s cash balance has decreased $4,281 from $17,424 at December 31, 2006 to $13,143 at December 31, 2007.  Some of the major transactions that affected our cash balance were a $4,061 special dividend payment made on January 16, 2007, and a payment of $6,000 on March 7, 2007 pursuant to the Settlement Agreement outlined in Note 11 of the year-end Form 10-K.  Those payments were partially offset by cash generated from earnings for the year.

 

Accrued Legal Settlement and Related Costs have decreased $5,184 with a detailed description provided in Note 11, Commitments and Contingencies.

 

As discussed in Note 7, Shareholders’ Equity, in December of 2007 the Company declared a dividend, which amounted to $7,092.  In addition, the Company paid a $4,061 dividend on January 16, 2007, which was declared in 2006.

 

- 15 -

**RESULTS OF OPERATIONS**

**(All dollars in thousands)**

 

**Three-months ended December 31, 2007 vs. December 31, 2006**

 

The Company reported comparative results from continuing operations for the three-month period ended December 31, 2007 and 2006 as follows:

 

 

|              | **Three-months ended December 31,** |
|-------------------|-------------------------------------|
|              | (in thousands)                      |
|              |                                |   |   |   |
|              | **2007**                            | **2007** | **2006** | **2006** |
|              | **($000)**                          | **%** | **($000)** | **%** |
| Net Sales         | $19,711                             | 100.0% | $19,068 | 100.0% |
| Gross Profit      | $11,657                             | 59.1% | $  9,873 | 51.8% |
| Operating Profits | $  5,621                  | 28.5% | $ 4,315 | 22.6% |

 

The Company’s sales increased $643 (3.4%) from $19,068 in the three-month period ended December 31, 2006 as compared to $19,711 in the three-month period December 31, 2007.  The increase in revenue for the three-months reflects continued penetration in the non-residential construction market and price increases realized during the quarter.  Those factors were partially offset by continued weakness in the residential construction industry.  Overall volume for the quarter was down 8.7%.

 

The Company’s gross profit margins increased from 51.8% in the three-month period ended December 31, 2006 to 59.1% in the three-month period ended December 31, 2007.  The increase in margin is the result of a decrease in the cost of the Company’s primary raw materials during the quarter, in particular stainless steel combined with strategic price increases previously noted. 

 

Selling Expenses.  Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight.  Selling expense was in line with the prior year at $3,021 and $3,039 for the three months ended December 31, 2006 and 2007, respectively.  Sales expense as a percentage of sales decreased from 15.8% for the three-months ended December 31, 2006 to 15.4% for the three-months ended December 31, 2007.

 

General and Administrative Expenses.  General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, and corporate general and administrative services.  General and administrative expenses were $1,883 and $2,220 for the three months ended December 31, 2006 and 2007, respectively.  The $337 increase in expenses is mostly attributable to an increase in staffing related expenses, and consulting fees.  For the preceding reasons, general and administrative expense, as a percentage of sales, increased from 9.9% for the three months ended December 31, 2006 to 11.3% for the three months ended December 31, 2007.

 

 

 

- 16 -

Legal Settlement and Related Costs.  Legal charges related to the Arkansas litigation in the final three months of 2006 and 2007, were $175 and $31, respectively.  Further details are provided in Note 11, Commitments and Contingencies.  The majority of the costs associated with this litigation are behind the Company.

 

Engineering Expense.  Engineering expenses consist of development expenses associated with the development of new products and enhancements to existing products, and manufacturing engineering costs.  Engineering expenses were $479 and $746 for the three months ended December 31, 2006 and 2007 respectively.  The $267 increase in engineering expenses is mostly due to an increase in new product development costs and partially due to increases in consulting and engineering staffing.  Accordingly, engineering expenses as a percentage of sales grew to 3.8% for the three months ended December 31, 2007 from 2.5% for the three months ended December 31, 2006.

 

Reflecting all of the factors mentioned above, Operating Profit margins increased $1,306 from a profit of $4,315 in the three-month period ended December 31, 2006 to a profit of $5,621 in the three-month period ended December 31, 2007.  The increase in Operating Profit was primarily as a result of the negative effect of the legal settlement of the class action litigation on the fourth quarter 2006 operating results.

 

Interest Income-Net.  Interest income-net includes interest income on the note receivable from Mestek and interest income on our interest-bearing investments.  

 

Other Income-Net.  Other Income-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our U.K. subsidiary.

 

Income Tax Expense.  The Company’s effective tax rate in 2007 approximates the 2006 rate and does not differ materially from expected statutory rates.

 

**Twelve-months ended December 31, 2007 vs. December 31, 2006**

 

The Company reported comparative results from continuing operations for the twelve-month period ended December 31, 2007 and 2006 as follows:

 

|              | **Twelve-months ended December 31,** |
|-------------------|--------------------------------------|
|              | (in thousands)                       |
|              |                                 |   |
|              | **2007**                             | **2007** | **2006** | **2006** |
|              | **($000)**                           | **%** | **($000)** | **%** |
| Net Sales         | $74,510                              | 100.0% | $73,574 | 100.0% |
| Gross Profit      | $36,054                              | 48.4% | $38,158 | 51.9% |
| Operating Profits | $13,212                    | 17.7% | $7,444 | 10.1% |

 

 

The Company’s sales increased from $73,574 in the twelve-month period ended December 31, 2006 as compared to $74,510 in the twelve-month period ended December 31, 2007.  Sales reflect growth in the non-residential construction and international markets coupled with strategic price increases.  These increases were however, dampened by a decrease in sales in the residential construction industry.  Overall volume for the twelve months was down 7.5%.

 

 

- 17 -

The Company’s gross profit margins have decreased from 51.9% in the twelve-month period ended December 31, 2006 to 48.4% in the twelve-month period ended December 31, 2007, indicative of increases to the cost of the Company’s primary raw materials, particularly stainless steel.

 

Selling Expenses.  Selling expense was $11,493 and $11,976 for the twelve-months ended December 31, 2006 and 2007, respectively.  The $483 increase in selling expenses is mostly due to increases in various marketing programs, but also attributable to increased staffing and related costs.  Sales expense as a percentage of sales increased to 16.1% for the twelve-months ended December 31, 2007 as compared to 15.6% for the twelve-months ended December 31, 2006.

 

General and Administrative Expenses.  General and administrative expenses increased from $6,833 in 2006 to $7,657 for the twelve-months ended December 31, 2007.  The $824 increase was mostly attributable to staffing related expenses and consulting.  As a percentage of sales, general and administrative costs increased from 9.3% for the twelve-months ended December 31, 2006 to 10.3% for the twelve-months ended December 31, 2007.

 

Legal Settlement and Related Costs.  Legal charges related to the Arkansas litigation in the twelve months of 2006 and 2007, were $10,499 and $516, respectively.  Further details are provided in Note 11, Commitments and Contingencies.  The Company believes the majority of the litigation costs associated with this case is behind us.

 

Engineering Expense.  Engineering expenses were $1,889 and $2,693 for the twelve-months ended December 31, 2006 and 2007 respectively.  The $804 increase in engineering expenses is largely due to expenditures associated with the certification and qualification of new products and to a lesser extent increased staffing and related costs.  Engineering expenses as a percentage of sales were 2.6% for the twelve-months ended December 31, 2006 and 3.6% for the twelve-months ended December 31, 2007.

 

Reflecting all of the factors mentioned above, Operating Profit margins increased $5,768 from $7,444 in the twelve-month period ended December 31, 2006 to $13,212 in the twelve-month period ended December 31, 2007.  The increase in Operating Profit was primarily as a result of the negative effect of the legal settlement of the class action litigation on the 2006 operating results.

 

Interest Income-Net.  Interest income-net includes interest income on the note receivable from Mestek and interest income on our interest-bearing investments.  In the first quarter of 2006 the Company paid interest associated with the mortgage on our manufacturing facility; however, as disclosed in the December 31, 2006 10-K, that mortgage was paid off on April 27, 2006.

 

Other Income-Net.  Other Income-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our U.K. subsidiary.

 

Income Tax Expense.  The Company’s effective tax rate in 2007 approximates the 2006 rate and does not differ materially from expected statutory rates.

 

 

- 18 -

**COMMITMENTS AND CONTINGENCIES**

 

**Commitments****:**

 

On September 5, 2006 the Company entered into a Stipulation and Settlement Agreement with the Class Representatives and Class Counsel, to settle and resolve the allegations brought forth in the lawsuit titled *Lovelis, et al. v. Titeflex Corp., Inc., et al.*in the Arkansas Circuit Court, Clark County.  All of the other defendants in the case also signed the Settlement Agreement.  The lawsuit related to allegations that the Company’s CSST products posed an unreasonable risk of fire due to lightning strikes.  Both the Company and the other defendants denied these allegations, and denied any wrongdoing or legal liability, but agreed to settle this matter to avoid further cost and the uncertainty and risk of the outcome of further litigation.

 

The court gave final approval to the Settlement Agreement on February 1, 2007 and dismissed the case.  The remedial program provided under the Settlement Agreement processed claims from class members through the deadline of September 5, 2007.

 

Under the Settlement Agreement, the Company has agreed to pay the value of each payment voucher redeemed by a class member for the installation of a lightning protection system or bonding and grounding of the Company’s CSST product.  The amount of the voucher is dependent on the geographical area in the United States where the building is located and the size of the heated or air-conditioned area of the building, as set forth in the Settlement Agreement.  The Company also agreed to pay a fixed amount of administrative expenses in providing notice to the class, and establishing and operating a claim system under which class members may obtain information, submit claims, and have claims processed.  Finally, the Company agreed to pay attorneys’ fees to the Class Counsel to resolve this matter.  

 

The Company cannot determine the exact amount for which it may be liable for the costs of the payment vouchers tendered under the claim program, because of the number of unknown variables associated with this liability, including; the number of buildings in the United States that contain the Company’s CSST product; the number of payment vouchers that are properly and timely submitted by claimants; the extent to which vouchers are for lightning protection systems or for bonding and grounding; the geographical location of the building within the United States; and the size of the building in which the CSST is located.  However, the Company estimated that the total amount of the liability relating to the settlement of the litigation would fall within a range of approximately $8,810 and $10,200.  Thus far the Company has paid approximately $6,571 related to the Settlement with a remainingliability of $1,239 allocated as a Short-Term Liability and $1,000 recorded as Long-Term.  This amount is based on currently available information and certain estimates and judgments, and is subject to revision as actual claims are received, and a claim history is established.  In addition, there is a $33 current liability for legal services related to the Settlement.  As of December 31, 2007, the third party administrator of the settlement program has received 756 claims relating to the Company’s products in connection with the Settlement.

 

On February 4, 2008, the Company reached an agreement for final payment relating to the class action settlement described in detail in Note 11, Commitments and Contingencies.  This final payment, which was made on March 3, 2008, in the amount of $1,850, represents the $1,000 current portion due as previously disclosed, and the remaining $1,000 long-term portion which was due in March of 2009, less a $150 (15%) reduction resulting from early payment.  The Company’s remaining obligations under the settlement relate only to the funding of claims made to the settlement administrator, which we have previously estimated at about $210.

 

- 19 -

 

Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both.  The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and limitations set forth in each of the agreements.  Under the terms of the Agreement, the Company is contingently liable for costs, which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors.

 

The Company has entered into salary continuation agreements with two employees, which provide for monthly payments to each of the employee or his designated beneficiary upon the employee’s retirement or death.  The payment benefits range from $1 per month to $3 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65.  The agreements also provide for survivorship benefits if the employee dies before attaining age 65; and severance payments if the employee is terminated without cause, the amount of which is dependent on the length of company service at the date of termination.  The net present value of the retirement payments is included in Other Long-Term Liabilities, which amounts to $312 for December 31, 2007 and $268 for December 31, 2006, respectively.  The Company has obtained and is the beneficiary of three whole life insurancepolicies in respect of the two employees discussed above, and one other policy.  The cash surrender value of such policies (included in Other Assets) amounts to $521 at December 31, 2007 and $448 at December 31, 2006, respectively.

 

The Company entered into a Separation Agreement and General Release with Duane E. Shooltz, formerly the general manager of the Company’s TracPipe® business.  The agreement became effective on October 8, 2007. Under the agreement, Mr. Shooltz will receive $172, to be paid in 39 equal weekly payments beginning on October 8, 2007.  The Company recorded a charge for the full $172 in the fourth quarter of 2007, relating to the Separation Agreement.

 

The Company entered into a Revolving Line of Credit Note and a Loan Agreement with Sovereign Bank, N.A., whereby the company established a line of credit facility for a one-year duration, and in the maximum amount of $7,500.  The loan agreement provides for the payment of any loan under the agreement at a rate that is either the prime rate less 1%, or LIBOR rate plus 1%.  As of December 31, 2007, the Company does not have any loans or loan balances outstanding under the loan agreement.

 

**Contingencies:**

 

The Company retains significant obligations under its commercial insurance policies for losses occurring in the policy years in which it was a subsidiary of Mestek, Inc.  For the policy year ending October 1, 2004, the Company retained liability for the first $2,000 per occurrence of commercial general liability claims (including product liability claims), subject to an agreed aggregate.  In addition, for 2004 the Company retained liability for the first $250 per occurrence of workers compensation coverage, subject to an agreed aggregate.  However, for policy years beginning on July 22, 2005 (the effective date of the Spin-Off), the Company retained liability for a maximum of $50 per occurrence of commercial liability claims (including products liability claims), subject to an agreed aggregate, and the Company is insured on a ‘first dollar’ basis for workers’ compensationsubject to statutory limits.

 

 

- 20 -

Prior to the Spin-Off, the Company self-insured a substantial portion of the health benefits provided for its employees, and maintained reserves in this regard and relied upon a recognized actuarial consulting firm to help it set and maintain these reserves.  After the Spin-Off, the Company’s liability is limited to $30 per case and an aggregate of $620 annually.

 

**Warranty Commitments:**

 

Gas transmission products such as those made by the Company carry potentially serious personal injury risks in the event of failures in the field.  As a result, the Company has extensive internal testing and other quality control procedures and historically the Company has not had a meaningful failure rate in the field due to the extensive nature of these quality controls.  Due to the Company’s quality systems, the warranty expense is *de minimis*, and accordingly, the Company does not maintain a warranty reserve beyond a nominal amount.

 

**FUTURE IMPACT OF KNOWN TRENDS OR UNCERTAINTIES**

 

The Company’s operations are sensitive to a number of market factors, any one of which could materially adversely affect its results of operations in any given year:

 

Construction Activity—The Company is directly impacted by the level of single family and multi-family residential housing starts and, to a lesser extent, commercial construction starts. Historically low interest rates had contributed to strong residential construction activity in recent years. Significant increases in interest rates or reductions in residential construction activity for other reasons in future periods, however, could be expected to adversely affect the Company’s revenues, possibly materially.

 

Technological Changes—Although the HVAC industry has historically been impacted by technology changes in a relatively incremental manner, it cannot be discounted that radical changes—such as might be suggested by fuel cell technology, burner technology and/or other developing technologies which might impact the use of natural gas—could materially adversely affect the Company’s results of operations and/or financial position in the future.

 

Weather Conditions—The Company’s flagship TracPipe® and CounterStrike ®products are used in residential and commercial heating applications. As such, the demand for its products is impacted by weather as it affects the level of construction.  Furthermore, severe climatic changes, such as those suggested by the “global warming” phenomenon, could over time adversely affect the demand for heating products and adversely affect the Company’s results of operations and financial position.

 

Purchasing Practices—It has been the Company’s policy in recent years to aggregate purchase volumes for high value commodities with fewer vendors to achieve maximum cost reductions while maintaining quality and service. This policy has been effective in reducing costs but has introduced additional risk which could potentially result in short-term supply disruptions or cost increases from time to time in the future.

 

Supply Disruptions and Commodity Risks—The Company uses a variety of materials in the manufacture of its products, including stainless steel, polyethylene and brass for its AutoFlare® connectors. In connection with the purchase of commodities, principally stainless steel for manufacturing requirements, the Company typically enters into one-year purchase 

 

- 21 -

commitments which include a designated fixed price range.  These agreements require the Company to accept delivery of the commodity in the quantities committed, at the agreed upon prices.  Transactions required for these commodities in excess of the one year commitments are conducted at current market prices at the Company’s discretion.  In addition to the raw material cost strategy described above, the Company enters into fixed pricing agreements for the fabrication charges necessary to convert these commodities into useable product.Management believes at present that it has adequate sources of supply for its raw materials and components (subject to the risks described above under Purchasing Practices) and has historically not had significant difficulty in obtaining the raw materials, component parts or finished goods from itssuppliers. The Company is not dependent for any commodity on a single supplier, the loss of which would have a material adverse effect on its business.

 

Interest Rate Sensitivity—The Company currently has no borrowing with any lending institutions and therefore has very little risk related to interest rate volatility.  Interest rates are nonetheless significant to the Company as a participant in the residential construction industry. (See Construction Activity, above.)

 

Retention of Qualified Personnel – The Company does not operate with multiple levels of management. It is relatively “flat” organizationally, which does subject the Company to the risks associated with the loss of critical managers for whatever reason. From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive for the Company to attract and retain qualified employees. The Company is dependent upon the relatively unique talents and managerial skills of a small number of key executives.

 

**CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES**

**(All Amounts in Thousands)**

 

Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the Notes to the Consolidated Financial Statements include a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition, accounts receivable valuations, inventory valuations, goodwill and intangible asset valuations, product liability costs, workers compensation claims reserves, health care claims reserves, and accounting for income taxes. Actual amounts could differ significantly from these estimates.

 

Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:

 

**Revenue Recognition**

 

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe.  Under generally accepted accounting principles, revenues 

 

- 22 -

are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.  The following criteria represent preconditions to the recognition of revenue:

 

|   | **•** | Persuasive evidence of an arrangement for the sale of product or services must exist. |
|--------|------------|---------------------------------------------------------------------------------------|

 

|   | **•** | Delivery has occurred or services rendered. |
|--------|------------|---------------------------------------------|

 

|   | **•** | The sales price to the customer is fixed or determinable. |
|--------|------------|-----------------------------------------------------------|

 

|   | **•** | Collection is reasonably assured. |
|--------|------------|-----------------------------------|

 

The Company generally recognizes revenue upon shipment in accordance with the above principles.

 

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company.  This includes promotional incentives, year-end rebates, and discounts.  The amounts of certain incentives are estimated at the time of sale.

 

Commissions, for which the Company receives an identifiable benefit, are accounted for as a sales expense.

 

**Accounts Receivable**

 

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

 

**Inventory**

 

Inventories are valued at the lower of cost or market.  Cost of inventories are determined by the first-in, first-out (FIFO) method.  The Company generally considers inventory quantities beyond two-years’ usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly.

 

**Goodwill and Intangible Assets**

 

In accordance with FAS 142, the Company ceased recording amortization of goodwill and intangible assets with indefinite lives effective January 1, 2002.  The Company performed annual impairment tests in accordance with FAS 142 as of December 31, 2006 and December 31, 2007 which analyses indicated in all cases no impairment of goodwill.

 

**Product Liability Reserves**

 

As explained more fully under Contingencies, the Company retains liability for the first $50 of product liability claims. To date, the Company has not experienced a meaningful product failure rate.

 

- 23 -

**Workers Compensation Claims Reserves**

 

Prior to the Spin-Off, the Company provided workers compensation coverage principally through commercial insurance carriers using “high deductible” programs, which required the Company to reserve for and pay a high proportion of its workers compensation claims payable and relied upon the expertise of its insurance carriers and its own historical experience in setting the reserves related to these claims.  One such workers compensation claim is still outstanding from the pre-Spin-Off period for which the company remains liable for amounts up to the deductible. The Company maintains a reserve for these amounts.  The remaining potential liability is minimal, as this case is reaching the maximum deductible.

 

|   | The Company is insured on a ‘first dollar’ basis. |
|--------|-------------------------------------------------------------|

 

**Health Care Claim Reserves**

 

|   | The Company’s liability is limited to $30 per case and an aggregate of $620 annually. |
|--------|--------------------------------------------------------------------------------------------|

 

**Accounting for Income Taxes**

 

The Company accounts for federal tax liabilities in accordance with SFAS No. 109, “Accounting for Income Taxes”.  Under this method the Company recorded tax expense and related deferred taxes and tax benefits.

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain.

 

**LIQUIDITY AND CAPITAL RESOURCES**

**(All dollars in thousands)**

 

**Twelve Months ended December 31, 2007**

 

As of December 31, 2007, we had $13,143 in consolidated cash, cash equivalents and short-term investments, which is $4,281 less than at December 31, 2006 mostly resulting from cash payments during the first quarter of 2007 of $4,061 for a special dividend, and $6,000 related to the Legal Settlement discussed in Note 11.  The decrease was partially offset by cash generated from earnings for the year.

 

**Operating Activities**

 

Cash provided by operations for 2007 was $1,117 compared with $11,769 in 2006, a $10,652 decrease.  The most significant component was the $6,000 payment related to the Legal Settlement.  

 

Accounts receivable provided $2,147 for the twelve-months ending December 31, 2006 compared to $442 used during the twelve months of 2007.  The decrease is predominately due to 

 

- 24 -

Company applying approximately $2,800 of credits to customer’s accounts in 2006 for promotional rebates earned in lieu of receiving a cash payment.

 

**Investing Activities**

 

Capital spending for the twelve-months ended December 31, 2007 was $542.  Capital spending in the twelve-months ended December 31, 2006 was $1,373.

 

On September 12, 2007, the Company announced that its Board of Directors authorized the purchase of up to $5,000 of its common stock.  The purchases may be made from time-to-time in open market or in privately negotiated transactions, depending on market and business conditions, within the next 24 months.  The Board retained the right to cancel extend, or expand the share buyback program, at any time and from time-to-time.  For all of 2007, the Company purchased 25,117 shares for $367.

 

**Financing**

 

Cash used in financing activities during 2007 was $4,428 which was mostly related to the special dividend of $4,061.  This is compared to $3,411 in 2006 when the Company paid off the entire outstanding principal balance remaining on the Company’s main operating facility in Exton, Pennsylvania, as discussed in detail in Note 6.

 

The Company entered into a Revolving Line of Credit Note and a Loan Agreement with Sovereign Bank, N.A., whereby the Company established a line of credit facility for a one-year duration, and in the maximum amount of $7,500.  The loan agreement provides for the payment  of any loan under the agreement at a rate that is either prime rate less 1% or LIBOR rate plus 1%  As of December 31, 2007 the Company does not have any loans or loan balances outstanding, under the loan agreement.

 

The Company believes its liquidity position as of December 31, 2007 is fully adequate to meet foreseeable future needs and that the Company will possess adequate cash reserves to meet its day-to-day needs including any acquisitions or capital expenditures or stock repurchases it can reasonably foresee at this time. 

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In June, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”).  This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.

 

Effective January 1, 2007, the Company has adopted the provisions of FIN 48.  No adjustment was required to retained earnings as a result of the adoption of this standard.

 

As of January 1, 2007, the Company has provided a liability of $546 for unrecognized tax benefits related to various federal and state income tax matters.  Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, is $500.  The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax 

 

- 25 -

rate consists of items that are offset by the federal tax benefit of state income tax items of $64.  The reserve has increased by $18 in the twelve months ended December 31, 2007.

 

The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

 

The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended 2005 and 2006.  The Company and its Subsidiaries state income tax returns are subject to audit for the calendar years ended 2003 through 2006.

 

In September 2006, the FASB issued Statement No. 157,*Fair Value Measurements* ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  SFAS 157 will be applied prospectively and will be effective for periods beginning after November 15, 2007.  The Company is currently evaluating the effect, if any, of SFAS 157 on the Company's consolidated financial statements.

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. This Statement applies to all entities, including not-for-profit organizations.  SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2008. The Company is currently evaluating the impact of SFAS 159 on its consolidated financial statements

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160 “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  The guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  An entity may not apply it before that date.  The Company believes that this new pronouncement will not have any significant impact on the Company’s financial statements in future periods.

 

In December 2007, the FASB issued SFAS No. 141 (R) “Business Combinations” (“SFAS 141R”).  SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.  SFAS 141R****also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  An entity may not applyit before that date.  The Company believes that this new pronouncement will have an impact on our accounting for future business combinations once adopted, but the effect is dependent upon the acquisitions that are made in the future.

 

 

- 26 -

Off-Balance Sheet Obligations or Arrangements

 

The Company has off-balance sheet obligations or arrangements at December 31, 2007 that relate to purchase commitments and operating lease obligations totaling $25,738.  The total amount of these obligations at December 31, 2006 was $27,114.

 

**Item 7A - QUANTITATATIVE AND QUALITATIVE MARKET RISKS**

 

The Company does not engage in the purchase or trading of market risk sensitive instruments. The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations.  No market risk sensitive instruments are held for speculative or trading purposes.

 

- 27 -

 

**Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of Omega Flex, Inc.

 

We have audited the consolidated balance sheets of Omega Flex, Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

As described in Note 2 to the financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.

 

/s/ Vitale Caturano & Company, Ltd.

 

 

Boston, Massachusetts

March 6, 2008

 

 

 

 

 

- 28 -

 

**OMEGA FLEX, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**As of December 31,**

**(Dollars in thousands)**

 

|                                                                                                                                                                                                                                                                                      | **2007**        | **2006**        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|-----------------|
|                                                                                                                                                                                                                                                                                      |            |            |
| ASSETS                                                                                                                                                                                                                                                                                    |            |            |
| Current Assets                                                                                                                                                                                                                                                                            |            |            |
| Cash and Cash Equivalents                                                                                                                                                                                                                                                                 | $13,143         | $17,424         |
| Accounts Receivable - less allowances of $137 and $79,           respectively                                                                                                                                                           | 10,132          | 9,745           |
| Inventories                                                                                                                                                                                                                                                                               | 10,567          | 8,149           |
| Note Receivable from former Parent Company                                                                                                                                                                                                                                                | 3,250           | ---   |
| Deferred Taxes                                                                                                                                                                                                                                                                            | 1,179           | 2,847           |
| Other Current Assets                                                                                                                                                                                                                                                                      | 705             | 529             |
|                                                                                                                                                                                                                                                                                      |            |            |
| Total Current Assets                                                                                                                                                                                                                                                                      | 38,976          | 38,694          |
|                                                                                                                                                                                                                                                                                      |            |            |
| Property and Equipment – net                                                                                                                                                                                                                                                         | 6,749           | 6,705           |
| Goodwill - net                                                                                                                                                                                                                                                                            | 3,526           | 3,526           |
| Note Receivable from former Parent Company                                                                                                                                                                                                                                                | ---   | 3,250           |
| Other Long Term Assets                                                                                                                                                                                                                                                                    | 521             | 448             |
|                                                                                                                                                                                                                                                                                      |            |            |
| Total Assets                                                                                                                                                                                                                                                                              | $49,772         | $52,623         |
|                                                                                                                                                                                                                                                                                      |            |            |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                                                                                 |            |            |
| Current Liabilities:                                                                                                                                                                                                                                                                      |            |            |
| Accounts Payable                                                                                                                                                                                                                                                                          | 1,486           | 1,236           |
| Accrued Compensation                                                                                                                                                                                                                                                                      | 2,692           | 2,362           |
| Accrued Commissions and Sales Incentives                                                                                                                                                                                                                                                  | 3,032           | 4,859           |
| Accrued Legal Settlement and Related Costs                                                                                                                                                                                                                                                | 1,272           | 6,456           |
| Dividends Payable                                                                                                                                                                                                                                                                         | 7,092           | 4,061           |
| Taxes Payable                                                                                                                                                                                                                                                                             | 377             | 1,967           |
| Other Accrued Liabilities                                                                                                                                                                                                                                                                 | 2,046           | 1,432           |
|                                                                                                                                                                                                                                                                                      |            |            |
| Total Current Liabilities                                                                                                                                                                                                                                                                 | 17,997          | 22,373          |
|                                                                                                                                                                                                                                                                                      |            |            |
| Deferred Taxes                                                                                                                                                                                                                                                                            | 1,216           | 146             |
| Long-Term portion of Accrued Legal Settlement                                                                                                                                                                                                                                             | 1,000           | 2,000           |
| Other Liabilities                                                                                                                                                                                                                                                                         | 891             | 318             |
|                                                                                                                                                                                                                                                                                      |            |            |
| Total Liabilities                                                                                                                                                                                                                                                                         | 21,104          | 24,837          |
|                                                                                                                                                                                                                                                                                      |            |            |
| Minority Interests                                                                                                                                                                                                                                                                        | 129             | 55              |
|                                                                                                                                                                                                                                                                                      |            |            |
| Shareholders’ Equity:                                                                                                                                                                                                                                                                |            |            |
| Common Stock – par value $0.01 share: authorized 20,000,000-          shares: 10,128,516 and 10,153,633 shares issued and          outstanding at December 31, 2007 and 2006, respectively | 102             | 102             |
| Paid in Capital                                                                                                                                                                                                                                                                           | 11,372          | 11,739          |
| Retained Earnings                                                                                                                                                                                                                                                                         | 16,651          | 15,061          |
| Accumulated Other Comprehensive Income                                                                                                                                                                                                                                                    | 414             | 829             |
|                                                                                                                                                                                                                                                                                      |            |            |
| Total Shareholders’ Equity                                                                                                                                                                                                                                                           | 28,539          | 27,731          |
|                                                                                                                                                                                                                                                                                      |            |            |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                                                                                                           | $49,772         | $52,623         |

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

- 29 -

 

**OMEGA FLEX, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**For the years ended December 31,**

 

|                                        | **2007**                                       | **2006**    |
|---------------------------------------------|---------------------------------------------------------------|----------------------------|
|                                        | **(Amounts in  thousands, except earnings per Common Share)** |
| Net Sales                                   | $74,510                                                       | $73,574                    |
|                                        |                                                          |                       |
| Cost of Goods Sold                          | 38,456                                                        | 35,416                     |
|                                        |                                                          |                       |
| Gross Profit                                | 36,054                                                        | 38,158                     |
|                                        |                                                          |                       |
| Selling Expense                             | 11,976                                                        | 11,493                     |
| General and Administrative Expense          | 7,657                                                         | 6,833                      |
| Engineering Expense                         | 2,693                                                         | 1,889                      |
| Legal Settlement and Related Costs          | 516                                                           | 10,499                     |
|                                        |                                                          |                       |
| Operating Profit                            | 13,212                                                        | 7,444                      |
|                                        |                                                          |                       |
| Interest Income, Net                        | 562                                                           | 562                        |
| Other Income, Net                           | 34                                                            | 220                        |
|                                        |                                                          |                       |
| Income Before Income Taxes                  | 13,808                                                        | 8,226                      |
|                                        |                                                          |                       |
| Income Tax Expense                          | 5,126                                                         | 3,062                      |
|                                        |                                                          |                       |
| Net Income                                  | 8,682                                                         | $5,164                     |
|                                        |                                                          |                       |
| Basic Earnings per Common Share        | $0.86                                                         | $0.51                      |
|                                        |                                                          |                       |
| Basic Weighted Average Shares Outstanding   | 10,152                                                        | 10,154                     |
|                                        |                                                          |                       |
| Diluted Earnings per Common Share           | $0.86                                                         | $0.51                      |
|                                        |                                                          |                       |
| Diluted Weighted Average Shares Outstanding | 10,152                                                        | 10,154                     |

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

- 30 -

**OMEGA FLEX, INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)**

**For the years ended December 31, 2007 and 2006**

 

| **(Dollars in Thousands)**        | **Common Stock****Outstanding** | **Common****Stock** | **Paid In****Capital** | **Retained****Earnings** | **Accumulated**

**Other**

**Comprehensive**

**Income (Loss)** | **Total**     |
|-----------------------------------|---------------------------------|---------------------|------------------------|--------------------------|------------------------------------------------------------------|---------------|
| Balance -December 31, 2005        | 10,153,633                 | $102                | $11,739           | $13,958             | $272                                                             | $25,071  |
|                              |                            |                |                   |                     |                                                             |          |
| Net Income                        |                            |                |                   | 5,164               |                                                             | 5,164    |
| Cumulative Translation Adjustment |                            |                |                   |                     | 557                                                              | 557      |
| Net Comprehensive Income          |                            |                |                   |                     |                                                             | 5,721    |
| Dividends Accrued                 |                            |                |                   | (4,061)                  |                                                             | (4,061)       |
| Balance -December 31, 2006        | 10,153,633                 | $102                | $11,739           | $15,061             | $829                                                             | $27,731  |
|                              |                            |                |                   |                     |                                                             |          |
| Net Income                        |                            |                |                   | 8,682               |                                                             | 8,682    |
| Cumulative Translation Adjustment |                            |                |                   |                     | (415)                                                            | (415)         |
| Net Comprehensive Income          |                            |                |                   |                     |                                                             | 8,267    |
| Purchase of Shares for Treasury   | (25,117)                        |                | (367)                  |                     |                                                             | (367)         |
| Dividends Accrued                 |                            |                |                   | (7,092)                  |                                                             | (7,092)       |
| Balance -December 31, 2007        | 10,128,516                 | $102                | $11,372           | $16,651             | $414                                                   | $28,539  |
|                              | ========                        | ===                 | ======            | ======              | ===                                                              | ======   |
|                              |                            |                |                   |                     |                                                             |          |
|                              |                            |                |                   |                     |                                                             |          |
|                              |                            |                |                   |                     |                                                             |          |
|                              |                            |                |                   |                     |                                                             |          |
|                              |                            |                |                   |                     |                                                             |          |
|                              |                            |                |                   |                     |                                                             |          |
|                              |                            |                |                   |                     |                                                             |          |
|                              |                            |                |                   |                     |                                                             |          |

 

 

See Accompanying Notes to Consolidated Financial Statements

 

- 31 -

**OMEGA FLEX, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**For the years ended December 31,**

 

|                                                 | **2007**   | **2006**   |
|------------------------------------------------------|----------------------|----------------------|
|                                                 |                 |                 |
|                                                 |                 |                 |
| Cash Flows from Operating Activities:                |                 |                 |
| Net Income                                           | $8,682          | $5,164          |
| Adjustments to Reconcile Net Income to               |                 |                 |
| Net Cash Provided by Operating Activities:           |                 |                 |
| Non-Cash Compensation Expense                        | 15              | 1               |
| Depreciation and Amortization                        | 498             | 417             |
| Provision for Losses on Accounts                     |                 |                 |
| Receivable, net of write-offs and recoveries         | 58              | 46              |
| Change in Minority Interests                         | 74              | 32              |
| Changes in Assets and Liabilities:                   |                 |                 |
| Accounts Receivable                                  | (442)                | 2,147           |
| Inventory                                            | (2,408)              | (1,921)              |
| Accounts Payable                                     | 250             | (318)                |
| Accrued Compensation                                 | 330             | (269)                |
| Accrued Legal Settlement & Related Costs         | (6,184)              | 8,371           |
| Other Liabilities                                    | (1,175)              | 782             |
| Other Assets                                         | 1,419           | (2,683)              |
| Net Cash Provided by Operating Activities            | 1,117           | 11,769          |
|                                                 |                 |                 |
| Cash Flows from Investing Activities:                |                 |                 |
| Capital Expenditures                                 | (542)                | (1,373)              |
|                                                 |                 |                 |
| Net Cash Used In Investing Activities                | (542)                | (1,373)              |
|                                                 |                 |                 |
| Cash Flows from Financing Activities:                |                 |                 |
| Treasury Stock Purchases                             | (367)                | ---        |
| Principal Payments Under Long Term Debt Obligations  | ---             | (3,411)              |
| Dividends Paid                                       | (4,061)              | ---             |
|                                                 |                 |                 |
| Net Cash Provided by (Used In) Financing Activities  | (4,428)              | (3,411)              |
|                                                 |                 |                 |
| Net Increase (Decrease) in Cash and Cash Equivalents | (3,853)              | 6,985           |
|                                                 |                 |                 |
| Translation effect on cash                           | (428)                | 557             |
| Cash and Cash Equivalents - Beginning of Period      | 17,424          | 9,882           |
|                                                 |                 |                 |
| Cash and Cash Equivalents - End of Period            | $13,143         | $17,424         |
|                                                 | ======          | ======          |
|                                                 |                 |                 |
| Schedule of Non-cash Financing Activities            |                 |                 |
| Accrual of dividend declared                         | $7,092          | $4,061          |
|                                                 | =====                | =====           |
|                                                 | $7,092          | $4,061          |

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

- 32 -

**OMEGA FLEX, INC.**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. BASIS OF PRESENTATION AND CONSOLIDATION**

 

|   | **Description of Business** |
|--------|-----------------------------|

 

The accompanying consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”).  The Company’s audited  consolidated financial statements for the year ended December 31, 2007 have been prepared in accordance with generally accepted accounting principles, and with the instructions of Form 10-K and Article 10 of Regulation S-X.  Operations at Omega Flex Limited, our United Kingdom subsidiary, which in previous years were consolidated on a one-month lag have been adjusted to a December 31 year-end in 2007.  The impact of eliminating the one-month lag on prior period financial statements was insignificant.  All material inter-company accounts and transactions have been eliminated in consolidation.

 

The Company is a leading manufacturer of flexible metal hose, which is used in a variety of applications to carry gases and liquids within their particular applications.  These applications include carrying liquefied gases in certain processing applications, fuel gases within residential and commercial buildings and vibration absorbers in high vibration applications.  Our industrial flexible metal piping is used to carry other types of gases and fluids in a number of industrial applications where the customer requires the piping to have both a degree of flexibility and/or an ability to carry corrosive compounds or mixtures, or to carry at both very high and very low (cryogenic) temperatures.

 

The Company manufactures flexible metal hose at its facility in Exton, Pennsylvania, and sells its product through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and in certain European markets.

 

**2. SIGNIFICANT ACCOUNTING POLICIES**

 

|   | **Use of Estimates** |
|--------|----------------------|

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition and related sales incentives, accounts receivable valuations, inventory valuations, goodwill valuation, and accounting for income taxes.  Actual amounts could differ significantly from these estimates.

 

|   | **Revenue Recognition** |
|--------|-------------------------|

 

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe.  Under generally accepted accounting principles, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.  The following criteria represent preconditions to the recognition of revenue:

 

- 33 -

 

|   | **•** | Persuasive evidence of an arrangement for the sale of product or services must exist. |
|--------|------------|---------------------------------------------------------------------------------------|

 

|   | **•** | Delivery has occurred or services rendered. |
|--------|------------|---------------------------------------------|

 

|   | **•** | The sales price to the customer is fixed or determinable. |
|--------|------------|-----------------------------------------------------------|

 

|   | **•** | Collection is reasonably assured. |
|--------|------------|-----------------------------------|

 

The Company generally recognizes revenue upon shipment in accordance with the above principles.

 

|   | **Cash Equivalents** |
|--------|----------------------|

 

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include investments in an institutional money market fund, which invests in U.S. Treasury bills, notes and bonds, and/or repurchase agreements, backed by such obligations.  Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits.  The Company has not experienced any losses related to these balances, and management believes its credit risk to be minimal.

 

|   | **Inventories** |
|--------|-----------------|

 

Inventories are valued at the lower of cost or market. Cost of inventories are determined by the first-in, first-out (FIFO) method.  The Company generally considers inventory quantities beyond two-years’ usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly.

 

|   | **Property and Equipment** |
|--------|----------------------------|

 

Property and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant improvements are capitalized.

 

|   | **Excess of Cost Over Net Assets of Acquired Companies (Goodwill)** |
|--------|---------------------------------------------------------------------|

 

In accordance with FAS 142, the Company ceased recording amortization of goodwill and intangible assets with indefinite lives effective January 1, 2002.  The Company performed annual impairment tests in accordance with FAS 142 as of December 31, 2006 and December 31, 2007 which analyses indicated in all cases no impairment of goodwill.

 

|   | **Advertising Expense** |
|--------|-------------------------|

 

Advertising costs are charged to operations as incurred.  Such charges aggregated $610 and $464, for the years ended December 31, 2007, and 2006, respectively.

 

- 34 -

|   | **Research and Development Expense** |
|--------|--------------------------------------|

 

Research and development expenses are charged to operations as incurred. Such charges aggregated $1,121, and $703, for the years ended December 31, 2007 and 2006, respectively and are included in Engineering expense in the accompanying financial statements.

 

|   | **Shipping Costs** |
|--------|--------------------|

 

Shipping costs are included in selling expense on the Statement of Operations. The expense relating to shipping was $1,978 in 2007 and $2,066 in 2006.

 

|   | **Provision for Doubtful Accounts** |
|--------|-------------------------------------|

 

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance.  The Company determines the allowance based on any known collection issues, historical experience, and other currently available evidence.  Due to a viable customer base and strong credit policies the Company had recognized only nominal expenses with regard to uncollectible accounts for the years ended December 31, 2007 and 2006.  In regards to identifying uncollectible accounts, the Company reviews an Aging report on a consistent basis to determine past due accounts and charges off those accounts that are deemed uncollectible once all collection efforts have been exhausted.

 

|   | **Earnings per Common Share** |
|--------|-------------------------------|

 

Basic earnings per share have been computed using the weighted average number of common shares outstanding.

 

|   | **Stock Based Compensation** |
|--------|------------------------------|

 

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), *Share-Based Payment*, (“SFAS 123R”), using the statement’s modified prospective application method.  Prior to January 1, 2006, the Company followed SFAS No. 123, *Accounting for Stock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123,* which required entities to recognize as expense over the vesting period the fair value of stock-based awards on the date of grant or measurement date. 

 

Under the provisions of SFAS 123R, the Company recognizes the estimated fair value of stock based compensation in the consolidated statement of operations over the requisite service period of each option granted.  Under the modified prospective application method of SFAS 123R, the Company applies the provisions of SFAS 123R to all awards granted or modified after January 1, 2006, as well as any unvested awards outstanding on January 1, 2006.  The Company had no stock options outstanding at December 31, 2006 and made no option grants during 2007 and 2006.

 

During 2006, the Company established the Omega Flex, Inc. 2006 Phantom Stock Plan as described in detail in Note 11 under the caption “Stock Based Plans”.  In accordance with SFAS 123R, the Company recorded compensation expense of approximately $15 in 2007 related to the Phantom Stock Plan.

 

- 35 -

|   | **Currency Translation** |
|--------|--------------------------|

 

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet date.  The Statement of Operations is translated into U.S. dollars at average exchange rates.  Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity.  Exchange gains and losses resulting from foreign currency transactions (excluding long-term inter-company receivables) are included in operations (other income (expense)) in the period in which they occur.

 

|   | **Income Taxes** |
|--------|------------------|

 

The Company accounts for federal tax liabilities in accordance with SFAS No. 109, “Accounting for Income Taxes”.  Under this method the Company recorded tax expense and related deferred taxes and tax benefits.

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain.

 

|   | **Other Comprehensive (Loss) Income** |
|--------|---------------------------------------|

 

For the years ended December 31, 2007 and 2006, respectively, the components of Other Comprehensive (Loss) Income consisted solely of foreign currency translation adjustments.

 

|   | **Significant Customer** |
|--------|--------------------------|

 

One customer accounted for approximately 19% of Sales in 2007 and 17% of Accounts Receivable at December 31, 2007.  One customer represented 18% of Sales in 2006 and 14% of Accounts Receivable at December 31, 2006.

 

|   | **New Accounting Pronouncements** |
|--------|-----------------------------------|

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. This Statement applies to all entities, including not-for-profit organizations.  SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending December 31, 2008. The Company is currently evaluating the impact of SFAS 159 on its consolidated financial statements.

 

 

- 36 -

In September 2006, the FASB issued Statement No. 157,*Fair Value Measurements* ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  SFAS 157 will be applied prospectively and will be effective for periods beginning after November 15, 2007.  The Company is currently evaluating the effect, if any, of SFAS 157 on the Company's consolidated financial statements.

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160 “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  The guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  An 

entity may not apply it before that date.  The Company believes that this new pronouncement will not have any significant impact on the Company’s financial statements in future periods.

 

In December 2007, the FASB issued SFAS No. 141 (R) “Business Combinations” (“SFAS 141R”).  SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.  SFAS 141R****also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  An entity may not applyit before that date.  The Company believes that this new pronouncement will have an impact on our accounting for future business combinations once adopted, but the effect is dependent upon the acquisitions that are made in the future.

 

**Reclassifications**

 

Certain reclassifications have been made to prior years’ financial statements to conform to the 2007 presentation.

 

**3. DISTRIBUTION FROM MESTEK, INC. (Spin-Off)**

 

The Company completed a Spin-Off from its former parent, Mestek, Inc. (Mestek) on July 29, 2005.  The Company’s common shares began trading on the NASDAQ Global Market under the trading symbol “OFLX” on August 1, 2005.

 

In connection with the Spin-Off, the Company executed certain agreements governing its relationship with Mestek subsequent to the date of the Spin-Off which are disclosed in the initial Form 10 and also discussed in detail in Note 3 of the December 31, 2006 Form 10-K filing.

 

At the effective date of the Spin-Off, Mestek was indebted to the Company in the amount of $3,250 which was converted on the effective date of the Spin-Off to a 3-year note receivable from Mestek bearing interest at 100 basis points above the then prevailing 3-year US Treasury note yield at approximately 5%.  The principal balance of the Note at December 31, 2007 and December 31, 2006 remained $3,250.  The interest income recorded on the note was approximately $163 for both 2007 and 2006.

 

 

- 37 -

 

In connection with the Mestek Note, on October 19, 2007 the Company entered into a Subordination Agreement with Bank of America, N.A.  Under the Agreement, Mestek shall be permitted to repay any regularly scheduled payment of the subordinated debt to the Company provided that, at the time of repayment there exists no event of default under the terms of Mestek’s loan agreement with Bank of America, or an instance of insolvency or bankruptcy.   If Mestek were to default under its loan agreement with Bank of America, or if it became insolvent, then the Company’s rights to collect the amounts due under the Mestek Note would become subordinate to the rights of Bank of America under its loan agreement with Mestek. 

 

**4. INVENTORIES**

 

|   | Inventories consisted of the following at December 31: |
|--------|--------------------------------------------------------|

 

 

|                 | **2007**       | **2006** |
|----------------------|----------------|----------|
|                 | (in thousands) |
|                 |           |     |
| Finished Goods       | $7,150         | $5,940   |
| Raw Materials        | 3,417          | 2,209    |
|                 |           |     |
| Total Inventory, Net | $10,567        | $8,149   |
|                 | ======         | =====    |

 

**5. PROPERTY AND EQUIPMENT**

 

|   | Property and equipment consisted of the following at December 31: |
|--------|-------------------------------------------------------------------|

 

 

|                     | **2007**                                                       | **2006**     | **Depreciation and Amortization Est.**

**Useful Lives** |
|--------------------------|----------------------------------------------------------------|--------------|----------------------------------------------------------|
|                     | (in thousands)         |         |
|                     |                                                           |         |                                                     |
| Land                     | $538                                                      | $538    |                                                     |
| Buildings                | 4,141                                                     | 4,141   | 39 Years                                                 |
| Leasehold Improvements   | 249                                                       | 39      | 3-10 Years                                               |
| Equipment                | 7,808                                                     | 7,476   | 3-10 Years                                               |
|                     | 12,736                                                    | 12,194  |                                                     |
| Accumulated Depreciation | (5,987)                                                        | (5,489)      |                                                     |
|                     | $6,749                                                    | $6,705  |                                                     |
|                     | =====                                                          | =====   |                                                     |

 

The above amounts include approximately $134 at December 31, 2007 and $1,161 at December 31, 2006 in assets that had not yet been placed in service by the Company.  No depreciation was recorded in the related periods for these assets.

 

Depreciation and amortization expense was approximately $498 and $417 for the years ended December 31, 2007 and 2006, respectively.

 

- 38 -

**6. DEBT**

 

Long-term Debt:

 

|   | The Company did not have any Long-term debt at December 31, 2007 or 2006. |
|--------|---------------------------------------------------------------------------|

 

On April 27, 2006, the Company’s subsidiary Exton Ranch, Inc. paid the entire outstanding principal balance (and accrued interest) of the $3.348 million Mortgage Note that was obtained from Sovereign Bank in 2004 to purchase the Company’s main facility in Exton, Pennsylvania.

 

Cash paid for interest was $0 and $78 during the years ended December 31, 2007 and 2006, respectively.

 

On September 4, 2007, the Company entered into a Revolving Line of Credit Note and a Loan Agreement with Sovereign Bank, N.A., whereby the company established a line of credit facility for a one-year duration, and in the maximum amount of $7,500.  The loan agreement provides for the payment of any loan under the agreement at a rate that is either prime rate less 1%, or LIBOR rate plus 1%.  As of December 31, 2007, the Company does not have any loans or loan balances outstanding under the loan agreement.  

 

**7. SHAREHOLDERS’ EQUITY**

 

As of December 31, 2007 and December 31, 2006, the Company had authorized 20,000,000 common stock shares with par value of $0.01 per share.  The Company had  10,128,516 and 10,153,633 shares issued and outstanding at December 31, 2007 and 2006, respectively.

 

On December 11, 2006, the Board of Directors authorized a special dividend of $0.40 per share to all shareholders of record as of January 2, 2007, and payable as soon as practicable.  The payment in the amount of $4,061 was subsequently paid on January 16, 2007.  No dividends were paid during 2006.

 

On December 11, 2007, the Board authorized a special dividend of $0.70 per share to all Shareholders of record as of January 3, 2008, which was subsequently paid on January 16, 2008 in the amount of $7,092.

 

Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant.

 

On September 12, 2007, the Company announced that its Board of Directors has authorized the purchase of up to $5,000 of its common stock.  The purchases may be made from time-to-time in open market or in privately negotiated transactions, depending on market and business conditions, within the next 24 months.  The Board retained the right to cancel, extend, or expand the share buyback program, at any time and from time-to-time.  During the fourth quarter of 2007, the Company purchased 25,117 shares for $367.

 

 

- 39 -

**8. INCOME TAXES**

 

Income tax expense consisted of the following:

 

|                | **2007**      | **2006**   |
|---------------------|--------------------|----------------------|
|                | **(in thousands)** |
| Federal Income Tax: |               |                 |
| Current             | $1,411             | $5,282          |
| Deferred            | 2,240              | (2,830)              |
| State Income Tax:   |               |                 |
| Current             | 178                | 813             |
| Deferred            | 336                | (429)                |
| Foreign Income Tax: |               |                 |
| Current             | 763                | ---             |
| Deferred            | 198                | 226             |
| Income Tax Expense  | $5,126             | $3,062          |
|                | =====              | =====           |

 

Pre-tax income included foreign income of $2,125 and $812 in 2007 and 2006, respectively.

 

Total income tax expense differed from “statutory” income tax expense, computed by applying the U.S. federal income tax rate of 35% to earnings before income tax, as follows:

 

|                                                                   | **2007**                                                                                                | **2006**  |
|------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|----------------|
|                                                                   | **(in thousands)**                |
|                                                                   |                                                                                                         |           |
| Computed “statutory” income tax expense                      | $4,833                                                                                                  | $2,879    |
| State income tax, net of federal tax benefit                           | 334                                                                                                     | 229       |
| Foreign tax rate differential                                          | (127)                                                                                                        | (58)           |
| Non-Cash Compensation  Expense –   permanent difference | ---                                                                                                     | ---       |
| Other - net                                                            | 86                                                                                                      | 12        |
| Income Tax Expense                                                     | $5,126                                                                                                  | $3,062    |
|                                                                   | =====                                                                                                   | =====     |

 

A deferred income tax (expense) benefit results from temporary timing differences in the recognition of income and expense for income tax and financial reporting purposes.  The components of and changes in the net deferred tax assets (liabilities) which give rise to this deferred income tax (expense) benefit for the years ended December 31, 2007 and 2006 are as follows:

 

|                          | **December 31,**   |
|-------------------------------|--------------------|
|                          | **2007**           | **2006** |   |
|                          | **(in thousands)** |
|                          |               |   |   |
| Current Deferred Taxes:       |               |   |   |
| Compensated Assets            | $96           | $101  |   |
| Inventory Valuation           | 293           | 312  |   |
| Accounts Receivable Valuation | 47            | 27  |   |
| Legal Reserves                | 852           | 2,458  |   |
| Other                         | 157           | 124  |   |
| Prepaid Expenses              | (266)              | (175) |   |
| Total Current                 | $1,179        | $2,847  |   |
|                          | =====         | =====  |   |

 

 

- 40 -

 

| Long Term Deferred Taxes:     |            |         |   |
|-------------------------------|-----------------|--------------|--------|
| Legal Reserves                | 0          | $765    |   |
| Foreign Tax Operating Loss    | 0          | 24      |   |
| FIN 48 Asset                  | 34         | 0       |   |
| Depreciation and Amortization | (1,250)         | (935)        |   |
| Total Long Term               | ($1,216)        | ($146)       |   |
|                          |            |         |   |
| Total Deferred Tax Liability  | ($37)           | $2,701  |   |
|                          | ===   | =====   |   |

 

At December 31, 2007, the Company has utilized all of its loss carry forwards in the United Kingdom.

 

Management believes it is more likely than not that the Company will have sufficient taxable income when these timing differences are reversed and that the deferred tax asset will be realized and accordingly no valuation allowance is deemed necessary.

 

|   | Cash paid for taxes in 2007 amounted to $3,450. |
|--------|-------------------------------------------------|

 

In June, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”).  This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.

 

Effective January 1, 2007, the Company has adopted the provisions of FIN 48.  No adjustment was required to retained earnings as a result of the adoption of this standard.

 

As of January 1, 2007, the Company has provided a liability of $546 for unrecognized tax benefits related to various federal and state income tax matters.  Of this amount, the amount that would impact the Company’s effective tax rate, if recognized, is $500.  The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by the federal tax benefit of state income tax items of $64.  The reserve has increased by $18 in the twelve-months ended December 31, 2007.

 

The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

 

The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended 2005 and 2006.  The Company and its Subsidiaries state income tax returns are subject to audit for the calendar years ended 2003 through 2006.

 

The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the year:

 

| Beginning Uncertain Tax Benefits       | $500,000 |
|----------------------------------------|----------|
| Current Year – Increases          | None     |
| Current Year – Decreases          | None     |
| Current Year – Interest/Penalties | None     |
| Settlements                            | None     |
| Expire Statutes                        | None     |
| Ending Uncertain Tax Benefits          | $500,000 |

 

 

- 41 -

 

**9. LEASES**

 

In the United Kingdom the Company leases a facility in Banbury, which serves sales, warehousing and operational functions.  The lease in Banbury was effective April 1, 2006 and has a 6.5 year term with an option to renew.  Prior to that, the Company leased office space in High Wycombe near London.

 

The Company sublet office space in Westfield, MA from a related party, Mestek, Inc., in 2006 and 2007 through the termination of the lease on July 31, 2007.  After July 31, 2007 the Company leased office space in Middletown, CT for approximately $7 a month.  The Company also leased warehouse space in Downingtown, PA on a month-to-month basis in both 2006 and 2007.

 

Rent expense for operating leases was approximately $541 and $380 for the years ended December 31, 2007, and 2006, respectively.

 

Future minimum lease payments under non-cancelable leases as of December 31, 2006 are as follows:

 

| **Year Ending December 31,** | **Operating Leases**           |
|------------------------------|--------------------------------|
|                         | (in thousands)                 |
|                         |                           |
| 2008                         | $518                      |
| 2009                         | 518                            |
| 2010                         | 527                            |
| 2011                         | 538                            |
| 2012                         | 297                            |
| Thereafter                   | 0                              |
|                         |                           |
| Total Minimum Lease Payments | $2,398     |
|                         | =====      |

 

**10. EMPLOYEE BENEFIT PLANS**

 

**Defined Contribution and 401-K Plans**

 

The Company maintains a qualified non-contributory profit-sharing plan covering all eligible employees. Contributions to the plan charged to expense were approximately $214 and $199, for the years ended December 31, 2007 and 2006, respectively.

 

Contributions to the Plan are defined as three percent (3%) of gross wages up to the current Old Age, Survivors, and Disability (OASDI) limit and six percent (6%) of the excess over the OASDI limit, subject to the maximum allowed under the Employee Retirement Income Security Act (ERISA).  The plan’s vesting terms fully vest participants over six years. 

 

The Company also maintains a savings & retirement plan qualified under Internal Revenue Code Section 401(k) for all employees.  Employees are eligible to participate in the Plan the first day of the month following date of hire.  Participants may elect to have up to fifty percent (50%) of their compensation withheld, up to the maximum allowed by the Internal Revenue Code.  After completing (1) year of service, the Company contributes an additional amount equal to 25% of all employee contributions, up to a maximum of 6% of an employee’s gross wages.  Contributions are funded on a current basis. Contributions to the Plan charged to expense for the years ended December 31, 2007 and 2006 were approximately $67 and $61, respectively.  The Company contribution vesting terms fully vest participants over six years.

 

- 42 -

 

**11. COMMITMENTSANDCONTINGENCIES**

 

**Commitments****:**

 

On September 5, 2006 the Company entered into a Stipulation and Settlement Agreement with the Class Representatives and Class Counsel, to settle and resolve the allegations brought forth in the lawsuit titled *Lovelis, et al. v. Titeflex Corp., Inc., et al.*in the Arkansas Circuit Court, Clark County.  All of the other defendants in the case also signed the Settlement Agreement.  The lawsuit related to allegations that the Company’s CSST products posed an unreasonable risk of fire due to lightning strikes.  Both the Company and the other defendants denied these allegations, and denied any wrongdoing or legal liability, but agreed to settle this matter to avoid further cost and the uncertainty and risk of the outcome of further litigation.

 

The court gave final approval to the Settlement Agreement on February 1, 2007 and dismissed the case.  The remedial program provided under the Settlement Agreement is currently processing claims from class members.  The deadline for submitting any claims was September 5, 2007.

 

Under the Settlement Agreement, the Company agreed to pay the value of each payment voucher redeemed by a class member for the installation of a lightning protection system or bonding and grounding of the Company’s CSST product.  The amount of the voucher is dependent on the geographical area in the United States where the building is located and the size of the heated or air-conditioned area of the building, as set forth in the Settlement Agreement.  The Company also agreed to pay a fixed amount of administrative expenses in providing notice to the class, and establishing and operating a claim system under which class members may obtain information, submit claims, and have claims processed.  Finally, the Company agreed to pay attorneys’ fees to the Class Counsel to resolve this matter.  

 

The Company cannot determine the exact amount for which it may be liable for the costs of the payment vouchers tendered under the claim program, because of the number of unknown variables associated with this liability, including; the number of buildings in the United States that contain the Company’s CSST product; the number of payment vouchers that are properly and timely submitted by claimants; the extent to which vouchers are for lightning protection systems or for bonding and grounding; the geographical location of the building within the United States; and the size of the building in which the CSST is located.  However, the Company estimated that the total amount of the liability relating to the settlement of the litigation would fall within a range of approximately $8,810 and $10,200.  Thus far the Company has paid approximately $6,571 related to the Settlement with a remainingliability of $1,239 allocated as a Short-Term Liability and $1,000 recorded as Long-Term.  This amount is based on currently available information and certain estimates and judgments, and is subject to revision as actual claims are received, and a claim history is established.  In addition, there is a $33 current liability for legal services related to the Settlement.  As of December 31, 2007, the third party administrator of the settlement program has received 756 claims relating to the Company’s products in connection with the Settlement.

 

Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both.  The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and 

 

- 43 -

limitations set forth in each of the agreements.  Under the terms of the Agreement, the Company is contingently liable for costs which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors.

 

The Company has entered into salary continuation agreements with two employees, which provide for monthly payments to each of the employee or his designated beneficiary upon the employee’s retirement or death.  The payment benefits range from $1 per month to $3 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65.  The agreements also provide for survivorship benefits if the employee dies before attaining age 65; and severance payments if the employee is terminated without cause, the amount of which is dependent on the length of company service at the date of termination.  The net present value of the retirement payments is included in Other Long-Term Liabilities, which amounts to $312 for December 31, 2007 and $268 for December 31, 2006, respectively.  The Company has obtained and is the beneficiary of three whole life insurancepolicies in respect of the two employees discussed above, and one other policy.  The cash surrender value of such policies (included in Other Assets) amounts to $521 at December 31, 2007 and $448 at December 31, 2006, respectively.  

 

The Company entered into a Separation Agreement and General Release with Duane E. Shooltz, formerly the general manager of the Company’s TracPipe® business.  The agreement became effective on October 8, 2007. Under the agreement, Mr. Shooltz will receive $172, to be paid in 39 equal weekly payments beginning on October 8, 2007.  The Company recorded a charge for the full $172 in the fourth quarter of 2007, relating to the Separation Agreement.

 

**Contingencies:**

 

The Company retains significant obligations under its commercial insurance policies for losses occurring in the policy years in which it was a subsidiary of Mestek, Inc.  For the policy year ending October 1, 2004, the Company retained liability for the first $2,000 per occurrence of commercial general liability claims (including product liability claims), subject to an agreed aggregate.  In addition, for 2004 the Company retained liability for the first $250 per occurrence of workers compensation coverage, subject to an agreed aggregate.  However, for policy years beginning on July 22, 2005 (the effective date of the Spin-Off), the Company retained liability for a maximum of $50 per occurrence of commercial liability claims (including products liability claims), subject to an agreed aggregate, and the Company is insured on a ‘first dollar’ basis for workers’ compensationsubject to statutory limits.  

 

Prior to the Spin-Off, the Company self-insured a substantial portion of the health benefits provided for its employees, and maintained reserves in this regard and relied upon a recognized actuarial consulting firm to help it set and maintain these reserves.  After the Spin-Off, the Company’s liability is limited to $30 per case and an aggregate of $620 annually.

 

**Warranty Commitments:**

 

Gas transmission products such as those made by the Company carry potentially serious personal injury risks in the event of failures in the field.  As a result, the Company has extensive internal testing and other quality control procedures and historically the Company has not had a meaningful failure rate in the field due to the extensive nature of these quality controls.  Due to the Company’s quality systems, the warranty expense is *de minimis*, and accordingly, the Company does not maintain a warranty reserve beyond a nominal amount.

 

- 44 -

 

**12. MINORITY INTERESTS**

 

Five percent of the Company’s Omega Flex Limited subsidiary is held by an unrelated third party, which is represented as Minority Interests in the Company’s financial statements.

 

**13. STOCK BASED PLANS**

 

**Phantom Stock Plan**

 

***Plan Description.***On April 1, 2006, the Company adopted the Omega Flex, Inc. 2006 Phantom Stock Plan (the “Plan”).  The Plan authorizes the grant of up to one million units of phantom stock to employees, officers or directors of the Company and of any of its subsidiaries.  The phantom stock units ("Units") each represent a contractual right to payment of compensation in the future based on the market value of the Company’s common stock.  The Units are not shares of the Company’s common stock, and a recipient of the Units does not receive any of the following:

 

|   | § | ownership interest in the Company |
|--------|--------|-----------------------------------|

|   | § | shareholder voting rights |
|--------|--------|---------------------------|

|   | § | dividends or distributions |
|--------|--------|----------------------------|

|   | § | other incidents of ownership to the Company’s common stock |
|--------|--------|-----------------------------------------------------------------|

 

The Units are granted to participants upon the recommendation of the Company’s CEO, and the approval of the compensation committee.  Each of the Units that are granted to a participant will be initially valued by the compensation committee, and at a minimum, the Unit’s value will be in an amount equal to the closing price of the Company’s common stock on the grant date.  The Units have a vesting schedule, with a maximum vesting schedule of 3 years after the grant date.  Upon vesting, the Units represent a contractual right to the payment of the value of the Unit.  The Units will be paid on their maturity date, which is a maximum of one year after all of the Units granted in a particular award have fully vested.  The amount to be paid to the participant on the maturity date is dependant on the type of Unit granted to the participant.  The Units may be *Full Value,* in which the value of each Unit at the maturity date, will equal the closing price of the Company’s common stock as of the maturity date; or *Appreciation Only*, in which the value of each Unit at the maturity date will equal to the closing price of the Company’s common stock at the maturity date *minus* the closing price of the Company’s common stock at the grant date.

 

In certain circumstances, the Units may be immediately vested upon the participant’s death or disability.  All Units granted to a participant are forfeited if the participant is terminated from his relationship with the Company or its subsidiary for “cause,” which is defined under the Plan.  If a participant’s employment or relationship with the Company is terminated for reasons other than for “cause,” then any vested Units will be paid to the participant upon termination.  However, Units granted to certain “specified employees” as defined in Section 409A of the Internal Revenue Code will be paid approximately 181 days after that termination.

 

***Grants of Phantom Stock Units.***On December 11, 2006, the Company granted 2,420 *Full Value* Units with a face value of $50 (fair value at the grant date of approximately $46).  On March 5, 2007, the Company granted an additional 3,178 *Full Value* Units with a face value of $70 (fair value at the grant date of approximately $65).  In both cases, the grant price was equal to the closing price of the Company’s common stock at the grant date.  Since the Plan came into existence in 2006, there are no outstanding Units relating to periods prior to 2006.

 

- 45 -

 

The Company uses the Black-Scholes option pricing model as its method for determining fair value of the Units.  The Company uses the straight-line method of attributing the value of the stock-based compensation expense relating to the Units.  The compensation expense (including adjustment of the liability to its fair value) from the Units is recognized over the service or vesting period of each grant or award.

 

Statement 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately to vest.  Forfeitures represent only the unvested portion of a surrendered Unit and are typically estimated based on historical experience.  As of October 8, 2007, in connection with an officer’s resignation, a total of 2,874 unvested units were forfeited, however; based on an analysis of the Company’s historical data, which has limited experience related to any stock based plan forfeitures, the Company applied a 0% forfeiture rate to Plan Units outstanding in determining its Plan Unit compensation expense for December 31, 2007.  

 

The fair value of the Units granted through the year ended December 31, 2007 using the Black-Scholes option-pricing model, uses the following assumptions:

 

 

| **Year Ended****December 31,** | **Expected Term** | **Expected Volatility****Factor** | **Expected Dividend****Amount** | **Risk-Free****Interest Rate** |
|--------------------------------|-------------------|-----------------------------------|---------------------------------|--------------------------------|
| 2006                           | 4.5               | 96.46%                            | 1.93%                           | 4.50%                          |
| 2007                           | 4.0               | 111.00%                           | 1.93%                           | 4.46%                          |

 

The Company has elected to use the “Simplified” method for calculating the Expected Term in accordance with SAB 107, and has opted to use the Expected Dividend Amount rather than an Expected Dividend Yield.

 

The following table summarizes information about phantom stock the Units outstanding at December 31, 2007:

 

|                                       | **Units** | **Weighted**

**Average Grant**

**Date Fair Value** |
|--------------------------------------------|-----------|------------------------------------------------------|
| Number of Phantom Stock Unit Awards:       |      |                                                 |
| Outstanding at December 31, 2006           | 2,420     | $18.94                                               |
| Granted                                    | 3,178     | $20.38                                               |
| Vested                                     | (---)     | ($---)                                               |
| Forfeited                                  | 2,874     | $19.18                                               |
| Canceled                                   | (---)     | ($---)                                               |
|                                       |      |                                                 |
| Outstanding at December 31, 2007           | 2,724     | $20.38                                               |
|                                       |      |                                                 |
| Phantom Stock Unit Awards Expected to Vest | 2,724     | $20.38                                               |

 

At December 31, 2007, none of the Units have vested.  The Units granted are expected to vest in three-year intervals, subject to earlier termination or forfeiture.

 

- 46 -

As of December 31, 2007, the unrecognized compensation costs related to Plan Units vesting will be primarily recognized over a period of approximately 3 years.

 

| **Fiscal year ending** | **2008** | **2009** | **2010** | **Total** |
|------------------------|----------|----------|----------|-----------|
|                   |     |     |     |      |
| Compensation Expense   | $19      | $19      | $3       | $41       |

 

The Units outstanding and exercisable at December 31, 2007 were in the following exercise price ranges:

 

|     |                        | **Units Outstanding**           |
|----------|-----------------------------|---------------------------------|
|     |                        |                            |   |   |   |
| **Year** | **Range of Exercise Price** | **Number of Units Outstanding** | **Weighted Average Remaining Contractual Life** | **Weighted Average Exercise Price** | **Aggregate Intrinsic Value** |
|     |                        |                            |   |   |   |
| 2007     | $22.02                      | 2,724                           | 2.17 | $20.38 | --- |

 

 

|     |                        | **Units Exercisable**           |
|----------|-----------------------------|---------------------------------|
|     |                        |                            |   |   |   |
| **Year** | **Range of Exercise Price** | **Number of Units Exercisable** | **Weighted-Average Remaining Contractual Life** | **Weighted-Average Exercise Price** | **Aggregate Intrinsic Value** |
|     |                        |                            |   |   |   |
| 2007     | $22.02                      | ---                             | 2.17 | $20.38 | --- |

 

 

| **14.** | **CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS** |
|---------|----------------------------------------------------------|

 

|   | **Mestek, Inc.** |
|--------|------------------|

 

The Company historically had related party transactions with Mestek, Inc., its 86% shareholder and parent prior to the Spin-Off. The Company relied on Mestek for various services including legal, treasury, tax, employee benefits, insurance, executive oversight and corporate office space. The Company’s Financial Statements include charges for these services of $19 in 2007 and $63 in 2006.  Effective with the date of the “Spin-Off”, these costs include only costs related to financial services, taxation and building rental.  As of July 1, 2007, all services provided by Mestek were terminated.  

 

**15.  SUBSEQUENT EVENTS**

 

On February 4, 2008, the Company reached an agreement for final payment relating to the class action settlement described in detail in Note 11, Commitments and Contingencies.  This final payment, which was made on March 3, 2008, in the amount of $1,850, represents the $1,000 current portion due as previously disclosed, and the remaining $1,000 long-term portion which was due in March of 2009, less a $150 (15%) reduction resulting from early payment.  The Company’s remaining obligations under the settlement relate only to the funding of claims made to the settlement administrator, which we have previously estimated at about $210.

 

- 47 -

**Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON** 

**ACCOUNTING FINANCIAL DISCLOSURE**

 

|   | None |
|--------|------|

 

**Item 9A(T) – CONTROLS AND PROCEDURES**

 

|   | (a) | Evaluation of Disclosure Controls and Procedures. |
|--------|-----|---------------------------------------------------|

 

We evaluated, under the supervision and with the participation of the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (“Exchange Act”), as amended as of December 31, 2007, the end of the period covered by this report on Form 10K.  Based on this evaluation, our Chief Executive Officer (principal executive officer), our Chief Financial Officer (principal financial officer) and Principal Accounting Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2007.  Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under theExchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to management, including the chief executive officer, chief financial officer and principal accounting officer, as appropriate, to allow timely decisions regarding required disclosures.  

 

|   | (b) | Management’s Report on Internal Control Over Financial Reporting. |
|--------|-----|------------------------------------------------------------------------|

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act and is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals and includes those policies and procedures that:

 

|   | **•** | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

- 48 -

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2007.  In making this assessment, the company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control-Integrated Framework*.

 

Based on its evaluation, our management has concluded that, as of December 31, 2007, our internal control over financial reporting was effective.

 

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

 

(c)  Remediation of Control Deficiency.

 

As of December 31, 2007 and in conjunction with our initial control assessment, we modified our accounting for certain inter-company and foreign currency transactions to appropriately account for and classify the results of these transactions.  The impact on current and prior period reporting was not material. The Company has implemented required changes to its controls and procedures.

 

(d)  Changes in Internal Control over Financial Reporting.

 

There were no changes on our internal control over financial reporting during the most recent quarter ended December 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  As noted above, we did modify certain controls and procedures related to an identified deficiency.

 

**Item 9B – OTHER INFORMATION**

 

All matters required to be disclosed on Form 8-K during our fiscal 2007 fourth quarter have been previously disclosed on a Form 8-K filed with the Securities and Exchange Commission.

 

- 49 -

**PART III**

 

With respect to items 10 through 14, the Company will file with the Securities and Exchange Commission, within 120 days of the close of its fiscal year, a definitive proxy statement pursuant to Regulation 14A.

 

**Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Information regarding directors of the Company will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 3, 2008, under the caption “Current Directors and Nominees for Election – Background Information”, and to the extent required and except as set forth therein, is incorporated herein by reference.

 

Information regarding executive officers of the Company will be set forth under the caption “Executive Officers” in the Company’s proxy statement, and to the extent required and except as set forth therein, incorporated herein by reference.

 

Information regarding the Company’s Audit Committee and its “Audit Committee Financial Expert” will be set forth in the Company’s proxy statement also, under the caption “Board Committees”, incorporated herein by reference. Information concerning section 16(a) Beneficial Ownership Reporting Compliance will be set forth in the Company’s proxy statement also, under the Caption “Compliance with Section 16(a) of the Securities Exchange Act” incorporated herein by reference.

 

The Company has adopted a Code Of Business Ethics (“Code”) applicable to its principal executive officer, principal financial and accounting officers, its directors and all other employees generally. A copy of the Code will be set forth as an appendix in the Company’s Proxy Statement and also may be found at the Company’s website www.omegaflex.com.  Any changes to or waivers from this Code will be disclosed on the Company’s website as well as in appropriate filings with the Securities and Exchange Commission.

 

**Item 11 - EXECUTIVE COMPENSATION**

 

Information regarding executive compensation will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 3, 2008, and under the caption “Executive Compensation” to the extent required and except as set forth therein, is incorporated herein by reference.

 

The report of the Compensation Committee of the Board of Directors of the Company shall not be deemed incorporated by reference by any general statement incorporating by reference the proxy statement into any filing under the Securities Exchange Act of 1934, and shall not otherwise be deemed filed under such Act.

 

**Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Information regarding security ownership of certain beneficial owners and management as well as information regarding equity compensation plans and individual equity contracts or

 

- 50 -

arrangements will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 3, 2008, under the caption “Security Ownership of Certain Beneficial Owners and Management”, and to the extent required and except as set forth therein, is incorporated herein by reference.

 

**Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information regarding certain relationships and related transactions will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 3, 2008, under the caption “Certain Relationships and Related Transactions” and to the extent required****and except as set forth therein, is incorporated herein by reference.

 

**Item 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

Information regarding financial accounting fees and services will be set forth in the Company’s proxy statement relating to the annual meeting of shareholders to be held June 3, 2008, under the caption “Principal Accounting Fees and Services”, and to the extent required, and except as set forth therein, is incorporated herein by reference.

 

 

**PART IV**

 

**Item 15 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K**

 

|   | (a) | The following documents are filed as part of this Form 10-K: |
|--------|-----|--------------------------------------------------------------|

 

|   | 1. | All financial statements. See Index to Consolidated Financial Statements on page 53 of this Form 10-K. |
|--------|----|--------------------------------------------------------------------------------------------------------|

 

|   | 2. | Financial Statement Schedules. None Required. |
|--------|----|-----------------------------------------------|

 

|   | 3. | Exhibits. See Index to Exhibits. |
|--------|----|----------------------------------|

 

- 51 -

 

| **INDEX**                                                                                                                                                                  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                       |   |
|                                                                                                                                                                       | **Pages of** |
|                                                                                                                                                                       | **this report** |
|                                                                                                                                                                       |   |
| Reports of Independent Registered Public Accounting Firms                                                                                                                  | Page 28 |
|                                                                                                                                                                       |   |
| Financial Statements:                                                                                                                                                      |   |
|                                                                                                                                                                       |   |
| (a)(1)    Consolidated Balance Sheets as of December 31, 2007 and 2006                                                                                 | Page 29 |
|                                                                                                                                                                       |   |
| Consolidated Statements of Operations for the Years 

Ended December 31, 2007, and 2006                                                                                    | Page 30 |
|                                                                                                                                                                       |   |
| Consolidated Statements of Shareholders’ Equity and Comprehensive         Loss for the Years Ended December 31, 2007 and 2006 | Page 31 |
|                                                                                                                                                                       |   |
| Consolidated Statements of Cash Flows for the Years 

Ended December 31, 2007 and 2006                                                                                     | Page 32 |
|                                                                                                                                                                       |   |
| Notes to the Consolidated Financial Statements                                                                                                                             | Pages 33 through 47 |
|                                                                                                                                                                       |   |
| (a)(2)    Financial Statement Schedules                                                                                                                |   |
|                                                                                                                                                                       |   |

 

All other financial statement schedules required by Item 14(a)(2) have been omitted because they are inapplicable or because the required information has been included in the Consolidated Financial Statements or notes thereto.

 

| (a)(3) | Exhibits |
|--------|----------|

 

The Exhibit Index is set forth on Pages 54 and 55.  No annual report to security holders as of December 31, 2007 has been sent to security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent by the registrant to more than ten of the registrant’s security holders with respect to any annual or other meeting of security holders held or to be held in 2007. Such annual report to security holders, proxy statement or form of proxy will be furnished to security holders subsequent to the filing of this Annual Report on Form 10-K.

 

- 52 -

**EXHIBIT INDEX**

 

Those documents followed by a parenthetical notation are incorporated herein by reference to previous filings with the Securities and Exchange Commission as set forth below.

 

|            |                                                                                                                                                        |              |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|
| **Exhibit No.** | **Description**                                                                                                                                             | **Reference Key** |
| **************  | **************                                                                                                                                              | **************    |
| 3.1             | Articles of Incorporation of Omega Flex, Inc., as amended                                                                                                   | (A)               |
|            |                                                                                                                                                        |              |
| 3.2             | Amended and Restated By-laws of Omega Flex, Inc.                                                                                                            | (A)               |
|            |                                                                                                                                                        |              |
| 10.1            | Indemnity and Insurance Matters Agreement dated July 29, 2005 between Omega Flex, Inc. and Mestek, Inc.                                                     | (A)               |
|            |                                                                                                                                                        |              |
| 10.2            | Form of Indemnification Agreements entered into between Omega Flex, Inc. and its Directors and Officers and the Directors of its wholly-owned subsidiaries. | (A)               |
|            |                                                                                                                                                        |              |
| 10.3            | Schedule of Directors/Officers with Indemnification Agreement                                                                                               | (A)               |
|            |                                                                                                                                                        |              |
| 10.4            | Tax Responsibility Allocation Agreement dated July 29, 2005 between Omega Flex, Inc. and Mestek, Inc.                                                       | (A)               |
|            |                                                                                                                                                        |              |
| 10.5            | Employment Agreement dated April 15, 1996 between Omega Flex, Inc. and Kevin R. Hoben                                                                       | (A)               |
|            |                                                                                                                                                        |              |
| 10.6            | Employment Agreement dated April 22, 1996 between Omega Flex, Inc. and Mark F. Albino                                                                       | (A)               |
|            |                                                                                                                                                        |              |
| 10.7            | Separation and Distribution Agreement dated July 29, 2005 between Omega Flex, Inc. and Mestek, Inc.                                                         | (A)               |
|            |                                                                                                                                                        |              |
| 10.8            | Transitional Services Agreement dated July 29, 2005 between Omega Flex, Inc. and Mestek, Inc.                                                               | (B)               |
|            |                                                                                                                                                        |              |
| 10.9            | Shareholders Agreement dated July 1, 1996                                                                                                                   | (B)               |
|            |                                                                                                                                                        |              |
| 10.10           | Promissory Note dated July 29, 2005 by Mestek, Inc. payable to Omega Flex, Inc. in the principal amount of $3,249,615.63.                                   | (B)               |
|            |                                                                                                                                                        |              |
| 10.11           | Executive Salary Continuation Agreement                                                                                                                     | (C)               |
|            |                                                                                                                                                        |              |
| 10.12           | Separation Agreement and Release dated October 1, 2007 between Omega Flex, Inc. and Duane E. Shooltz.                                                       | (D)               |
|            |                                                                                                                                                        |              |

 

 

- 53 -

 

| 10.13  | Phantom Stock Plan dated December 11, 2006.                                                                                                                    | (E)    |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                           |   |
| 10.14  | Form of Phantom Stock Agreement entered into between Omega Flex, Inc. and its directors, officers and employees, except as set forth in the attached schedule. | (E)    |
|   |                                                                                                                                                           |   |
| 10.15  | Schedule of Phantom Stock Agreements between Omega Flex, Inc. and its directors and executive officers.                                                        |   |
|   |                                                                                                                                                           |   |
| 14.1   | Code of Business Ethics                                                                                                                                        | (A)    |
|   |                                                                                                                                                           |   |
| 21.1   | List of Subsidiaries                                                                                                                                           | (A)    |
|   |                                                                                                                                                           |   |
| 23.1   | Consent of Vitale, Caturano & Company, Ltd.                                                                                                                |   |
|   |                                                                                                                                                           |   |
| 31.1   | CEO Certification                                                                                                                                              |   |
|   |                                                                                                                                                           |   |
| 31.2   | CFO Certification                                                                                                                                              |   |
|   |                                                                                                                                                           |   |
| 31.3   | PAO Certification                                                                                                                                              |   |
|   |                                                                                                                                                           |   |
| 32.1   | 906 CEO, CFO and PAO Certifications                                                                                                                            |   |
|   |                                                                                                                                                           |   |
| 99.1   | Information Statement                                                                                                                                          | (A)    |
|   |                                                                                                                                                           |   |
| 99.2   | Corporate Governance Guidelines                                                                                                                                | (A)    |

 

 

| Reference Key |                                                                                       |
|---------------|--------------------------------------------------------------------------------------------|
|          |                                                                                       |
| (A)           | Filed as an Exhibit to the Registration Statement on Form 10-12G filed on June 22, 2005.   |
|          |                                                                                       |
| (B)           | Filed as an Exhibit to the Registration Statement on Form 10-12G/A filed on July 19, 2005. |
|          |                                                                                       |
| (C)           | Filed as an Exhibit to the Annual Report on Form 10-K filed March 31, 2006.                |
|          |                                                                                       |
| (D)           | Filed as an Exhibit to the Quarterly Report on Form 10-Q filed November 13, 2007.          |
|          |                                                                                       |
| (E)           | Filed as an Exhibit to the Annual Report on Form 10-K filed April 2, 2007.                 |

 

Each management contract or compensatory plan or arrangement to be filed as an exhibit to this report pursuant to item 15 is listed in Exhibit numbers 10.1, 10.2 and 10.5.

 

- 54 -

 

 

**SIGNATURES**

 

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

 

 

| **OMEGA FLEX, INC.** |
|----------------------|

 

| Date:  March 28, 2008 | By:    | /S/ Kevin R. Hoben                         |
|-----------------------|--------|--------------------------------------------|
|                  |   | Kevin R. Hoben, President and              |
|                  |   | Chief Executive Officer                    |
|                  |   |                                       |
|                  |   |                                       |
| Date:  March 28, 2008 | By:    | /S/ E. Lynn Wilkinson                      |
|                  |   | E. Lynn Wilkinson, Vice President Finance, |
|                  |   | Chief Financial Officer                    |
|                  |   |                                       |
|                  |   |                                       |
| Date:  March 28, 2008 | By:    | /S/ Paul J. Kane                           |
|                  |   | Paul J. Kane,                              |
|                  |   | Principal Accounting Officer               |

 

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

 

 

|                  |   |                         |
|-----------------------|--------|------------------------------|
| Date:  March 28, 2008 | By:    | /S/ Mark F. Albino           |
|                  |   | Mark F. Albino, Director     |
|                  |   |                         |
|                  |   |                         |
| Date:  March 28, 2008 | By:    | /S/ Lawrence Cianciolo       |
|                  |   | Lawrence Cianciolo, Director |
|                  |   |                         |
|                  |   |                         |
| Date:  March 28, 2008 | By:    | /S/ David K. Evans           |
|                  |   | David K. Evans, Director     |
|                  |   |                         |
|                  |   |                         |
| Date:  March 28, 2008 | By:    | /S/ David W. Hunter          |
|                  |   | David W. Hunter, Director    |
|                  |   |                         |
|                  |   |                         |
| Date:  March 28, 2008 | By:    | /S/ Bruce C. Klink           |
|                  |   | Bruce C. Klink, Director     |
|                  |   |                         |
|                  |   |                         |
| Date:  March 28, 2008 | By:    | /S/ John E. Reed             |
|                  |   | John E. Reed, Director       |
|                  |   |                         |
|                  |   |                         |
| Date:  March 28, 2008 | By:    | /S/ Stewart B. Reed          |
|                  |   | Stewart B. Reed, Director    |
|                  |   |                         |
|                  |   |                         |
| Date:  March 28, 2008 | By:    | /S/ Edward J. Trainor        |
|                  |   | Edward J. Trainor, Director  |

 

 

- 55 -