##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-Q


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended December 31, 2006                                            
| 
|  |  | 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 I-4334


SUNAIR SERVICES CORPORATION





(Exact name of Registrant as specified in its charter)


|                                                                               |  |                                                    
|------------------------------------------------------------------------------ |  | ---------------------------------------------------
|Florida
    (State or other jurisdiction of incorporation or
    organization) |  | 59-0780772
    (I.R.S. Employer Identification No.)

|                                                                                                          |  |                     
|--------------------------------------------------------------------------------------------------------- |  | --------------------
|595 South Federal Highway, Suite 500
    Boca Raton, Florida
    (Address of principal executive offices) |  | 33432
    (Zip Code)

(561) 208-7400


(Registrants telephone number, including area code)







(Former name, former address and former fiscal year, if
changed since last report)




þ o


12b-2


o o þ


12b-2


o þ












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##### 










SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


INDEX


|                                                 |          |                       |                                                                                                               |      |    |    | 
|------------------------------------------------ | -------- | --------------------- | ------------------------------------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                 |          |                       |                                                                                                               | Page |   
|                                                 |          |                       |                                                                                                               | No.  |   
|                                                 |          |                       |                                                                                                               |      |   
|PART I.                                          |          | FINANCIAL INFORMATION |                                                                                                               |      | 3  |   
|                                                 | Item 1.  |                       | Financial Statements                                                                                          |      |    | 3  | 
|                                                 |          |                       | Consolidated Condensed Balance Sheets as of
    December 31, 2006 and September 30, 2006                      |      |    | 3  | 
|                                                 |          |                       | Consolidated Condensed Statements of
    Operations for the Three Months Ended December 31, 2006 and
    2005 |      |    | 4  | 
|                                                 |          |                       | Consolidated Condensed Statements of Cash
    Flows for the Three Months Ended December 31, 2006 and 2005     |      |    | 5  | 
|                                                 |          |                       | Notes to Unaudited Consolidated Condensed
    Financial Statements                                            |      |    | 7  | 
|                                                 | Item 2.  |                       | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                     |      |    | 17 | 
|                                                 | Item 3.  |                       | Quantitative and Qualitative Disclosures
    About Market Risk                                                |      |    | 20 | 
|                                                 | Item 4.  |                       | Controls and Procedures                                                                                       |      |    | 20 | 
|                                                
|PART II.                                         |          | OTHER INFORMATION     |                                                                                                               |      | 21 |   
|                                                 | Item 1.  |                       | Legal Proceedings                                                                                             |      |    | 21 | 
|                                                 | Item 1A. |                       | Risk Factors                                                                                                  |      |    | 21 | 
|                                                 | Item 2.  |                       | Unregistered Sales of Equity Securities and
    Use of Proceeds                                               |      |    | 21 | 
|                                                 | Item 3.  |                       | Defaults Upon Senior Securities                                                                               |      |    | 21 | 
|                                                 | Item 4.  |                       | Submission of Matters to a Vote of Security
    Holders                                                       |      |    | 21 | 
|                                                 | Item 5.  |                       | Other Information                                                                                             |      |    | 21 | 
|                                                 | Item 6.  |                       | Exhibits                                                                                                      |      |    | 21 | 
|                                                 |          |                       |                                                                                                               |      |    |    | 
|Signatures                                       |          |                       | 22                                                                                                            |     
|Ex-31.1 Section 302 Certification of CEO        
|Ex-31.2 Section 302 Certification of Interim CFO
|Ex-32.1 Section 906 Certification of CEO        
|Ex-32.2 Section 906 Certification of Interim CFO



2



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##### Table of Contents






PART I


FINANCIAL INFORMATION





Item 1. Financial Statements





SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED CONDENSED BALANCE SHEETS


AS OF DECEMBER 31, 2006 AND SEPTEMBER 30, 2006


(UNAUDITED)


|                                           |                                                                                                                                                                                        |                             |            |            |               |   |            |            |            | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ---------- | ---------- | ------------- | - | ---------- | ---------- | ---------- | 
|                                           |                                                                                                                                                                                        | December 31,                |            |            | September 30, |  
|                                           |                                                                                                                                                                                        | 2006                        |            |            | 2006          |  
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|ASSETS                                     |                                                                                                                                                                                        |                             |            |            |               |   |            |           
|                                          
|CURRENT ASSETS:                            |                                                                                                                                                                                        |                             |            |            |               |   |            |           
|                                           | Cash and cash equivalents                                                                                                                                                              |                             | $          | 1,580,897  |               |   | $          | 1,601,110  |           
|                                           | Accounts receivable, net                                                                                                                                                               |                             |            | 6,077,875  |               |   |            | 4,919,595  |           
|                                           | Income tax receivable                                                                                                                                                                  |                             |            | 352,393    |               |   |            | 352,393    |           
|                                           | Interest receivable                                                                                                                                                                    |                             |            | 21,539     |               |   |            | 11,084     |           
|                                           | Inventories, net                                                                                                                                                                       |                             |            | 2,318,454  |               |   |            | 2,328,205  |           
|                                           | Deferred tax asset                                                                                                                                                                     |                             |            | 137,387    |               |   |            | 137,387    |           
|                                           | Prepaid and other current assets                                                                                                                                                       |                             |            | 932,430    |               |   |            | 1,163,508  |           
|                                           | Note receivable  current                                                                                                                                                              |                             |            | 334,986    |               |   |            | 334,986    |           
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                           |                                                                                                                                                                                        | Total Current Assets        |            |            | 11,755,961    |   |            |            | 10,848,268 | 
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                          
|PROPERTY, PLANT, AND EQUIPMENT, net        |                                                                                                                                                                                        |                             | 2,370,940  |            |               |   | 2,538,434  |           
|                                          
|OTHER ASSETS:                              |                                                                                                                                                                                        |                             |            |            |               |   |            |           
|                                          
|                                           | Note receivable                                                                                                                                                                        |                             |            | 2,000,000  |               |   |            | 2,000,000  |           
|                                           | Software costs, net                                                                                                                                                                    |                             |            | 3,897,164  |               |   |            | 3,938,465  |           
|                                           | Customer list, net                                                                                                                                                                     |                             |            | 11,944,754 |               |   |            | 11,247,099 |           
|                                           | Goodwill                                                                                                                                                                               |                             |            | 55,517,787 |               |   |            | 52,818,269 |           
|                                           | Other assets                                                                                                                                                                           |                             |            | 655,190    |               |   |            | 522,427    |           
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                           |                                                                                                                                                                                        | Total Other Assets          |            |            | 74,014,895    |   |            |            | 70,526,260 | 
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                          
|TOTAL ASSETS                               |                                                                                                                                                                                        | $                           | 88,141,796 |            |               | $ | 83,912,962 |           
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                                        |                             |            |            |               |   |            |           
|                                          
|CURRENT LIABILITIES:                       |                                                                                                                                                                                        |                             |            |            |               |   |            |           
|                                           | Accounts payable                                                                                                                                                                       |                             | $          | 3,654,634  |               |   | $          | 2,743,523  |           
|                                           | Accrued expenses                                                                                                                                                                       |                             |            | 2,493,780  |               |   |            | 2,831,162  |           
|                                           | Unearned revenues                                                                                                                                                                      |                             |            | 1,266,222  |               |   |            | 589,365    |           
|                                           | Customer deposits                                                                                                                                                                      |                             |            | 2,348,345  |               |   |            | 2,677,364  |           
|                                           | Capitalized leases, current portion                                                                                                                                                    |                             |            | 26,742     |               |   |            | 8,796      |           
|                                           | Notes payable, current portion                                                                                                                                                         |                             |            | 135,006    |               |   |            | 138,374    |           
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                           |                                                                                                                                                                                        | Total Current Liabilities   |            |            | 9,924,729     |   |            |            | 8,988,584  | 
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                          
|LONG TERM LIABILITIES:                     |                                                                                                                                                                                        |                             |            |            |               |   |            |           
|                                          
|                                           | Capitalized leases, net of current portion                                                                                                                                             |                             |            |           |               |   |            | 20,027     |           
|                                           | Notes payable, net of current portion                                                                                                                                                  |                             |            | 3,182,233  |               |   |            | 1,723,642  |           
|                                           | Note payable -related party                                                                                                                                                            |                             |            | 5,000,000  |               |   |            | 5,000,000  |           
|                                           | Revolving line of credit                                                                                                                                                               |                             |            | 8,456,477  |               |   |            | 8,000,000  |           
|                                           | Deferred tax liability                                                                                                                                                                 |                             |            | 564,628    |               |   |            | 112,226    |           
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                           |                                                                                                                                                                                        | Total Long Term Liabilities |            |            | 17,203,338    |   |            |            | 14,855,895 | 
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                          
|                                           |                                                                                                                                                                                        | Total Liabilities           |            |            | 27,128,067    |   |            |            | 23,844,479 | 
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                          
|STOCKHOLDERS EQUITY:                      |                                                                                                                                                                                        |                             |            |            |               |   |            |           
|                                          
|                                           | Preferred stock, no par value, 8,000,000 shares authorized, none
    issued and outstanding                                                                                            |                             |            |           |               |   |            |           |           
|                                           | Common stock, $.10 par value, 100,000,000 shares authorized,
    13,017,559 and 13,007,559 shares issued and outstanding at
    December 31, 2006 and September 30, 2006, respectively |                             |            | 1,301,757  |               |   |            | 1,300,757  |           
|                                           | Additional paid-in capital                                                                                                                                                             |                             |            | 51,809,752 |               |   |            | 51,548,768 |           
|                                           | Retained earnings                                                                                                                                                                      |                             |            | 7,799,888  |               |   |            | 7,200,197  |           
|                                           | Accumulated other comprehensive gain  cumulative
    translation adjustment                                                                                                           |                             |            | 102,332    |               |   |            | 18,761     |           
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                           |                                                                                                                                                                                        | Total Stockholders Equity  |            |            | 61,013,729    |   |            |            | 60,068,483 | 
|                                           |                                                                                                                                                                                        |                             |            |            |               |  
|                                          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                        | $                           | 88,141,796 |            |               | $ | 83,912,962 |           
|                                           |                                                                                                                                                                                        |                             |            |            |               |  



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005


(UNAUDITED)


|                                                                                                                                               |                         |                               |            |            |                   |   |            |            |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----------------------------- | ---------- | ---------- | ----------------- | - | ---------- | ---------- | -------- | -
|                                                                                                                                               |                         | For the Three                 |            |            | For the Three     |  
|                                                                                                                                               |                         | Months Ended                  |            |            | Months Ended      |  
|                                                                                                                                               |                         | December 31, 2006             |            |            | December 31, 2005 |  
|                                                                                                                                               |                         |                               |            |            |                   |  
|SALES                                                                                                                                          |                         | $                             | 15,886,255 |            |                   | $ | 11,225,575 |           
|COST OF SALES                                                                                                                                  |                         |                               | 6,892,013  |            |                   |   | 4,614,085  |           
|                                                                                                                                               |                         |                               |            |            |                   |  
|GROSS PROFIT                                                                                                                                   |                         |                               | 8,994,242  |            |                   |   | 6,611,490  |           
|SELLING AND ADMINISTRATIVE EXPENSES                                                                                                            |                         |                               | 9,881,703  |            |                   |   | 7,176,680  |           
|                                                                                                                                               |                         |                               |            |            |                   |  
|LOSS FROM OPERATIONS                                                                                                                           |                         |                               | (887,461   | )          |                   |   | (565,190   | )         
|                                                                                                                                               |                         |                               |            |            |                   |  
|OTHER INCOME (EXPENSES):                                                                                                                       |                         |                               |            |            |                   |   |            |           
|                                                                                                                                               | Interest income         |                               |            | 67,774     |                   |   |            | 1,469      |         
|                                                                                                                                               | Interest expense        |                               |            | (288,323   | )                 |   |            | (411,175   | )       
|                                                                                                                                               | Other                   |                               |            | (22,801    | )                 |   |            | (4,789     | )       
|                                                                                                                                               |                         |                               |            |            |                   |  
|                                                                                                                                               |                         | Total Other Income (Expenses) |            |            | (243,350          | ) |            |            | (414,495 | )
|                                                                                                                                               |                         |                               |            |            |                   |  
|LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                                                            |                         |                               | (1,130,811 | )          |                   |   | (979,685   | )         
|INCOME TAX BENEFIT                                                                                                                             |                         |                               | 369,026    |            |                   |   | 420,495    |           
|                                                                                                                                               |                         |                               |            |            |                   |  
|LOSS FROM CONTINUING OPERATIONS                                                                                                                |                         |                               | (761,785   | )          |                   |   | (559,190   | )         
|INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX
    PROVISION OF $821,426 AND $100,272 FOR DECEMBER 31, 2006 AND
    2005, RESPECTIVELY |                         |                               | 1,361,476  |            |                   |   | 194,647    |           
|                                                                                                                                               |                         |                               |            |            |                   |  
|NET INCOME (LOSS)                                                                                                                              |                         | $                             | 599,691    |            |                   | $ | (364,543   | )         
|                                                                                                                                               |                         |                               |            |            |                   |  
|BASIC AND DILUTED INCOME (LOSS) PER SHARE:                                                                                                     |                         |                               |            |            |                   |   |            |           
|                                                                                                                                               | CONTINUING OPERATIONS   |                               | $          | (0.06      | )                 |   | $          | (0.05      | )       
|                                                                                                                                               |                         |                               |            |            |                   |  
|                                                                                                                                               | DISCONTINUED OPERATIONS |                               | $          | 0.11       |                   |   | $          | 0.02       |         
|                                                                                                                                               |                         |                               |            |            |                   |  
|                                                                                                                                               | NET INCOME (LOSS)       |                               | $          | 0.05       |                   |   | $          | (0.03      | )       
|                                                                                                                                               |                         |                               |            |            |                   |  
|WEIGHTED AVERAGE SHARES OUTSTANDING:                                                                                                           |                         |                               |            |            |                   |   |            |           
|                                                                                                                                               | BASIC                   |                               |            | 13,017,233 |                   |   |            | 10,512,464 |         
|                                                                                                                                               |                         |                               |            |            |                   |  
|                                                                                                                                               | DILUTED                 |                               |            | 13,017,233 |                   |   |            | 10,512,464 |         
|                                                                                                                                               |                         |                               |            |            |                   |  



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005


(UNAUDITED)


|                                      |                                                                                                        |                                     |                                       |            |                   |            |   |            |          |          |  
|------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------------------- | ---------- | ----------------- | ---------- | - | ---------- | -------- | -------- | -
|                                      |                                                                                                        | For the Three                       |                                       |            | For the Three     |           
|                                      |                                                                                                        | Months Ended                        |                                       |            | Months Ended      |           
|                                      |                                                                                                        | December 31, 2006                   |                                       |            | December 31, 2005 |           
|                                      |                                                                                                        |                                     |                                       |            |                   |           
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                                        |                                     |                                       |            |                   |            |   |           
|                                      | Net income (loss)                                                                                      |                                     | $                                     | 599,691    |                   |            | $ | (364,543   | )       
|                                      | Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities: |                                     |                                       |            |                   |            |   |            |         
|                                      |                                                                                                        | Depreciation                        |                                       |            | 235,918           |            |   |            | 202,734  |         
|                                      |                                                                                                        | Amortization                        |                                       |            | 561,406           |            |   |            | 466,172  |         
|                                      |                                                                                                        | Deferred taxes                      |                                       |            | 452,400           |            |   |            | (320,223 | )       
|                                      |                                                                                                        | Bad debt reserve                    |                                       |            | 5,747             |            |   |            | 1,936    |         
|                                      |                                                                                                        | Inventories reserve                 |                                       |            | 77,962            |            |   |            | (2,774   | )       
|                                      |                                                                                                        | (Gain) loss on sale of assets       |                                       |            | (2,346,367        | )          |   |            | 9,789    |         
|                                      |                                                                                                        | Equity based compensation           |                                       |            | 216,984           |            |   |            |         |         
|                                      |                                                                                                        | Stock based compensation            |                                       |            | 45,000            |            |   |            |         |         
|                                      |                                                                                                        | (Increase) decrease in Assets:      |                                       |            |                   |            |   |            |          |         
|                                      |                                                                                                        |                                     | Accounts receivable                   |            |                   | (1,130,709 | ) |            |          | 56,680   |  
|                                      |                                                                                                        |                                     | Interest receivable                   |            |                   | (10,453    | ) |            |          | 8,479    |  
|                                      |                                                                                                        |                                     | Inventories                           |            |                   | (64,710    | ) |            |          | 93,889   |  
|                                      |                                                                                                        |                                     | Prepaid and other current assets      |            |                   | 410,289    |   |            |          | (12,367  | )
|                                      |                                                                                                        |                                     | Other assets                          |            |                   | (108,785   | ) |            |          | (19,544  | )
|                                      |                                                                                                        | Increase (decrease) in Liabilities: |                                       |            |                   |            |   |            |          |         
|                                      |                                                                                                        |                                     | Accounts payable and accrued expenses |            |                   | 84,429     |   |            |          | 296,519  |  
|                                      |                                                                                                        |                                     | Unearned revenue                      |            |                   | (682       | ) |            |          | 81,480   |  
|                                      |                                                                                                        |                                     | Customer deposits                     |            |                   | (369,825   | ) |            |          | (125,884 | )
|                                      |                                                                                                        |                                     |                                       |            |                   |           
|                                      | Net Cash Provided By (Used In) Operating Activities                                                    |                                     |                                       | (1,341,705 | )                 |            |   | 372,343    |         
|                                      |                                                                                                        |                                     |                                       |            |                   |           
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                                        |                                     |                                       |            |                   |            |   |           
|                                      | Purchase of property, plant, and equipment                                                             |                                     |                                       | (98,204    | )                 |            |   | (161,289   | )       
|                                      | Software development costs                                                                             |                                     |                                       | (95,768    | )                 |            |   | (91,316    | )       
|                                      | Cash paid for business acquisitions                                                                    |                                     |                                       | (1,500,000 | )                 |            |   | (5,733,419 | )       
|                                      | Net proceeds from sale of property                                                                     |                                     |                                       | 2,522,274  |                   |            |   |           |         
|                                      |                                                                                                        |                                     |                                       |            |                   |           
|                                      | Net Cash Provided by (Used In) Investing Activities                                                    |                                     | $                                     | 828,302    |                   |            | $ | (5,986,024 | )       
|                                      |                                                                                                        |                                     |                                       |            |                   |           



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005


(UNAUDITED)


|                                                                            |                                                            |                   |           |           |                   |   |           |            |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------- | --------- | --------- | ----------------- | - | --------- | ---------- | -
|                                                                            |                                                            | For the Three     |           |           | For the Three     |  
|                                                                            |                                                            | Months Ended      |           |           | Months Ended      |  
|                                                                            |                                                            | December 31, 2006 |           |           | December 31, 2005 |  
|                                                                            |                                                            |                   |           |           |                   |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |                                                            |                   |           |           |                   |   |           |           
|                                                                            | Proceeds from (repayment of) line of credit                |                   | $         | 456,477   |                   |   | $         | (3,500,000 | )
|                                                                            | Repayment of notes payable                                 |                   |           | (44,777   | )                 |   |           | (12,204    | )
|                                                                            | Payment on capital leases                                  |                   |           | (2,081    | )                 |   |           | (23,351    | )
|                                                                            | Net proceeds from sale of common stock, net                |                   |           |          |                   |   |           | 9,457,515  |  
|                                                                            |                                                            |                   |           |           |                   |  
|                                                                            | Net Cash Provided By Financing Activities                  |                   |           | 409,619   |                   |   |           | 5,921,960  |  
|                                                                            |                                                            |                   |           |           |                   |  
|                                                                            | Effect of exchange rate fluctuations on cash               |                   |           | 83,571    |                   |   |           | (50,495    | )
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        |                                                            |                   | (20,213   | )         |                   |   | 257,784   |           
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              |                                                            |                   | 1,601,110 |           |                   |   | 3,220,699 |           
|                                                                            |                                                            |                   |           |           |                   |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                    |                                                            | $                 | 1,580,897 |           |                   | $ | 3,478,483 |           
|                                                                            |                                                            |                   |           |           |                   |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                           |                                                            |                   |           |           |                   |   |           |           
|                                                                            | Cash paid during the period for income taxes               |                   | $         |          |                   |   | $         |           |  
|                                                                            |                                                            |                   |           |           |                   |  
|                                                                            | Cash paid during the period for interest                   |                   | $         | 257,463   |                   |   | $         | 406,497    |  
|                                                                            |                                                            |                   |           |           |                   |  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
    ACTIVITIES: |                                                            |                   |           |           |                   |   |           |           
|                                                                            | Debt incurred in acquisition of Archer Exterminators, Inc. |                   | $         | 1,500,000 |                   |   | $         |           |  
|                                                                            |                                                            |                   |           |           |                   |  



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005


(UNAUDITED)


1. Basis of Consolidated Financial Statement
Presentation


10-Q 10-KSB.


2. Significant Accounting Policies




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





| |                    
| | -------------------
| | Accounts Receivable





| |            
| | -----------
| | Inventories





| |                               
| | ------------------------------
| | Property, Plant, and Equipment



|                           |  |               
|-------------------------- |  | --------------
|Buildings and improvements |  | 10 to 30 years
|Machinery and equipment    |  | 4 to 10 years 
|Automobiles                |  | 4 to 10 years 



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)






| |               
| | --------------
| | Software Costs





| |                                     
| | ------------------------------------
| | Goodwill and other intangible assets



Accounting for Impairment or Disposal of
Long-Lived Assets.






| |                                                                            
| | ---------------------------------------------------------------------------
| | Impairment of Long-Lived Assets and Long-Lived Assets to be
    Disposed of





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



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)






| |                  
| | -----------------
| | Advertising Costs





| |                         
| | ------------------------
| | Research and Development





| |                             
| | ----------------------------
| | Foreign Currency Translation

Telecom FM Ltd.




| |                     
| | --------------------
| | Comprehensive Income





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements









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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)










3. Acquisitions




| |                         
| | ------------------------
| | Acquisition of Spa Creek







|                    |  |   |           |  
|------------------- |  | - | --------- | -
|Goodwill            |  | $ | 5,732,933 |  
|Customer list       |  |   | 262,000   |  
|Accounts Receivable |  |   | 132,929   |  
|Inventory           |  |   | 66,475    |  
|Fixed assets        |  |   | 30,000    |  
|Customer deposits   |  |   | (279,917  | )
|Accrued expenses    |  |   | (211,001  | )
|                    |  |   |          
|Total               |  | $ | 5,733,419 |  
|                    |  |   |          



| |                       
| | ----------------------
| | Acquisition of Paragon



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)






| |                      
| | ---------------------
| | Acquisition of Pestec





| |                       
| | ----------------------
| | Acquisition of Ron Fee







|                      |  |   |           |  
|--------------------- |  | - | --------- | -
|Goodwill              |  | $ | 3,348,432 |  
|Customer list         |  |   | 1,554,000 |  
|Accounts receivable   |  |   | 235,000   |  
|Inventory             |  |   | 91,000    |  
|Fixed assets          |  |   | 440,000   |  
|Accounts payable      |  |   | (92,432   | )
|Customer deposits     |  |   | (22,000   | )
|Notes payable  autos |  |   | (29,000   | )
|                      |  |   |          
|Total                 |  | $ | 5,525,000 |  
|                      |  |   |          





| |                      
| | ---------------------
| | Acquisition of Archer



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##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)






|                    |  |   |           |  
|------------------- |  | - | --------- | -
|Goodwill            |  | $ | 2,660,622 |  
|Customer list       |  |   | 1,110,000 |  
|Accounts receivable |  |   | 33,318    |  
|Inventory           |  |   | 3,500     |  
|Fixed assets        |  |   | 146,127   |  
|Prepaid Expenses    |  |   | 215,178   |  
|Deferred Revenue    |  |   | (677,539  | )
|Customer deposits   |  |   | (40,806   | )
|                    |  |   |          
|Total               |  | $ | 3,450,400 |  
|                    |  |   |          



| |                                
| | -------------------------------
| | Pro-Forma Results of Operations



|                    |         |                                 |            |     |      |  |            |      |  
|------------------- | ------- | ------------------------------- | ---------- | --- | ---- |  | ---------- | ---- | -
|                    |         | Three Months Ended December 31, |           
|                    |         |                                 |           
|                    |         | 2006                            |            |     | 2005 | 
|                    |         |                                 |            |     |      | 
|Revenues            |         | $                               | 16,244,129 |     |      |  | 13,275,449 |     
|Net income (loss)   |         |                                 | 557,640    |     |      |  | (358,463   | )   
|Earnings per share: |         |                                 |            |     |      |  |            |     
|                    | Basic   |                                 |            | .04 |      |  |            | (.03 | )
|                    | Diluted |                                 |            | .04 |      |  |            | (.03 | )

4. Inventories


Inventories consist of the following:


|                |  |              |           |  |               |   |           | 
|--------------- |  | ------------ | --------- |  | ------------- | - | --------- | 
|                |  | December 31, |           |  | September 30, |  
|                |  | 2006         |           |  | 2006          |  
|                |  |              |           |  |               |  
|Materials       |  | $            | 1,336,729 |  |               | $ | 1,430,453 | 
|Work-in-process |  |              | 100,285   |  |               |   | 170,491   | 
|Finished goods  |  |              | 881,440   |  |               |   | 727,261   | 
|                |  |              |           |  |               |  
|                |  | $            | 2,318,454 |  |               | $ | 2,328,205 | 
|                |  |              |           |  |               |  



5. Earnings per Common Share




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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)




6. Preferred Stock




7. Revolving Line of Credit






8. Notes Payable










9. Stock Options




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##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)






|                              |  |           |         |   |                |   |       | 
|----------------------------- |  | --------- | ------- | - | -------------- | - | ----- | 
|                              |  | Number of |         |   | Average        |  
|                              |  | Shares    |         |   | Exercise Price |  
|                              |  |           |         |   |                |  
|Balances, beginning of period |  |           | 683,336 |   |                | $ | 8.44  | 
|Granted                       |  |           |        |   |                |   |       | 
|Exercised                     |  |           |        |   |                |   |       | 
|Cancelled                     |  |           | (43,282 | ) |                | $ | 12.11 | 
|                              |  |           |         |   |                |  
|Balances, end of period       |  |           | 640,054 |   |                | $ | 8.23  | 
|                              |  |           |         |   |                |  



|         |       |                     |                    |  |                     |                |  |                  |                |  |  |                    |       |  |  |  |         | 
|-------- | ----- | ------------------- | ------------------ |  | ------------------- | -------------- |  | ---------------- | -------------- |  |  | ------------------ | ----- |  |  |  | ------- | 
|         |       | Options Outstanding |                    |  | Options Exercisable |               
|         |       |                     |                    |  |                     |               
|Exercise |       |                     |                    |  | Weighted Average    |                |  | Weighted Average |                |  | 
|Price    |       |                     | Number Outstanding |  |                     | Remaining Life |  |                  | Exercise Price |  |  | Number Exercisable |      
|         |       |                     |                    |  |                     |                |  |                  |                |  |  |                    |      
|$        | 4.79  |                     |                    |  | 60,000              |                |  |                  | 3              |  |  | $                  | 4.79  |  |  |  | 60,000  | 
|$        | 5.00  |                     |                    |  | 166,667             |                |  |                  | 6              |  |  | $                  | 5.00  |  |  |  | 83,334  | 
|$        | 5.35  |                     |                    |  | 20,000              |                |  |                  | 7.5            |  |  | $                  | 5.35  |  |  |  | 15,000  | 
|$        | 5.60  |                     |                    |  | 100,000             |                |  |                  | 6.5            |  |  | $                  | 5.60  |  |  |  | 58,750  | 
|$        | 6.09  |                     |                    |  | 17,500              |                |  |                  | 7.5            |  |  | $                  | 6.09  |  |  |  |        | 
|$        | 13.78 |                     |                    |  | 94,962              |                |  |                  | 1              |  |  | $                  | 13.78 |  |  |  | 94,962  | 
|$        | 11.40 |                     |                    |  | 180,925             |                |  |                  | 7              |  |  | $                  | 11.40 |  |  |  | 45,231  | 
|         |       |                     |                    |  |                     |                |  |                  |                |  |  |                    |      
|         |       |                     |                    |  | 640,054             |                |  |                  |                |  |  |                    |       |  |  |  | 357,277 | 
|         |       |                     |                    |  |                     |                |  |                  |                |  |  |                    |      



| |           
| | ----------
| | Fair Value







14



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SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)






|                                       |                                                     |   |          |          |  
|-------------------------------------- | --------------------------------------------------- | - | -------- | -------- | -
|Net loss:                              |                                                     |   |          |         
|                                       | As reported                                         |   | $        | (364,543 | )
|                                       | Add: Stock-based compensation expense, as reported  |   |          |         |  
|                                       | Deduct: Stock-based compensation expense, pro forma |   |          | (94,931  | )
|                                       |                                                     |   |         
|Net loss, pro forma                    |                                                     |   | (459,747 | )       
|Net loss per share, basic:             |                                                     |   |          |         
|                                       | Basic, as reported                                  |   | $        | (0.03    | )
|                                       | Stock-based compensation expense, pro forma         |   | $        | (0.01    | )
|                                       |                                                     |   |         
|Net loss per share, basic, pro forma   |                                                     | $ | (0.04    | )       
|Net loss per share, diluted:           |                                                     |   |          |         
|                                       | Diluted, as reported                                |   | $        | (0.03    | )
|                                       | Stock-based compensation expense, pro forma         |   | $        | (0.01    | )
|                                       |                                                     |   |         
|Net loss per share, diluted, pro forma |                                                     | $ | (0.04    | )       



10. Segment Information






|                         |                                |                      |   |            |            |   |   |            |            |  
|------------------------ | ------------------------------ | -------------------- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                         |                                | 2006                 |   |            | 2005       |  
|                         |                                |                      |   |            |            |  
|Net revenues:            |                                |                      |   |            |            |   |   |           
|                         | Lawn and pest control services |                      | $ | 12,388,515 |            |   | $ | 9,456,794  |           
|                         | Telephone communications       |                      |   | 3,497,740  |            |   |   | 1,768,781  |           
|                         |                                |                      |   |            |            |  
|                         |                                | Total net revenues   |   | $          | 15,886,255 |   |   | $          | 11,225,575 |  
|                         |                                |                      |   |            |            |  
|Operating income (loss): |                                |                      |   |            |            |   |   |           
|                         | Lawn and pest control services |                      | $ | 979,824    |            |   | $ | 1,066,330  |           
|                         | Telephone communications       |                      |   | (128,890   | )          |   |   | (355,022   | )         
|                         | Unallocated Company expenses   |                      |   | (1,981,745 | )          |   |   | (1,690,391 | )         
|                         |                                |                      |   |            |            |  
|                         |                                | Total operating loss |   | $          | (1,130,811 | ) |   | $          | (979,083   | )
|                         |                                |                      |   |            |            |  

11. Discontinued Operations




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##### Table of Contents



SUNAIR SERVICES CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


For the three months ended December 31, 2006 and
December 31, 2005  (Continued)


(UNAUDITED)










|                                                   |  |      |           |   |      |   |           |  
|-------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                   |  | 2006 |           |   | 2005 |  
|                                                   |  |      |           |   |      |  
|Total net revenue                                  |  | $    | 0         |   |      | $ | 1,740,098 |  
|                                                   |  |      |           |   |      |  
|Pre-tax income (loss) from discontinued operations |  | $    | (186,266  | ) |      | $ | 294,919   |  
|Gain on sale of property                           |  |      | 2,369,168 |   |      |   |           |  
|Income tax effect                                  |  |      | (821,426  | ) |      |   | (100,272  | )
|                                                   |  |      |           |   |      |  
|Income on discontinued operations                  |  | $    | 1,361,476 |   |      | $ | 194,647   |  
|                                                   |  |      |           |   |      |  

16



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##### Table of Contents








|         |                                                                                          
|-------- | -----------------------------------------------------------------------------------------
|Item  2. | Managements Discussion And Analysis of Financial
    Condition and Results of Operations

Cautionary Statement Regarding Forward Looking
Information:




General:




The Lawn and Pest Control Services Segment:












17



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##### Table of Contents









Telephone Communications Segment:






Liquidity:










18



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##### Table of Contents



Capital Resources:






Results of Operations:


















19



---



##### Table of Contents



Discontinued Operations:











|         |                                                               
|-------- | --------------------------------------------------------------
|Item  3. | Quantitative and Qualitative Disclosures About Market
    Risk












|         |                        
|-------- | -----------------------
|Item  4. | Controls and Procedures









20



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##### Table of Contents






PART II


OTHER INFORMATION







|         |                  
|-------- | -----------------
|Item  1. | Legal Proceedings








|          |             
|--------- | ------------
|Item  1A. | Risk Factors

10-KSB







|         |                                                                
|-------- | ---------------------------------------------------------------
|Item  2. | Unregistered Sales of Equity Securities and Use of
    Proceeds








|         |                                
|-------- | -------------------------------
|Item  3. | Defaults Upon Senior Securities








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








|         |                  
|-------- | -----------------
|Item  5. | Other Information








|         |         
|-------- | --------
|Item  6. | Exhibits

| |      |  |  |                                                                                                               
| | ---- |  |  | --------------------------------------------------------------------------------------------------------------
| | 31.1 |  |  | Certification by Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002        
| | 31.2 |  |  | Certification by Interim Chief Financial Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002
| | 32.1 |  |  | Certification by Chief Executive Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002        
| | 32.2 |  |  | Certification by Interim Chief Financial Officer Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002

21



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SIGNATURES




|                        |  |                                                                                          
|----------------------- |  | -----------------------------------------------------------------------------------------
|                        |  | SUNAIR SERVICES CORPORATION                                                              
|                       
|Date: February 14, 2007 |  | /s/ John J. HayesJohn
    J. HayesPresident and Chief Executive Officer                  
|                       
|Date: February 14, 2007 |  | /s/ Edward M. Carriero,
    Jr.Edward
    M. Carriero, Jr.Interim Chief Financial Officer

22