**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D. C.  20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended May 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 0-12490





**ACR
      GROUP, INC.**


(Exact
      name of registrant as specified in its charter)





Texas
            
            74-2008473(State
                or other jurisdiction ofincorporation
                or organization)
            
            (I.R.S.
                EmployerIdentification
                No.)3200
                Wilcrest Drive, Suite 440, Houston, Texas
            
            77042-6039(Address
                of principal executive offices)
            
            (Zip
                Code)





(713)
                  780-8532(Registrant's
                  telephone number, including area
                  code)


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   x    No o





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





Large
      accelerated filer o                                           Accelerated
      filer o                                                      Non-accelerated
      filer x





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


Indicate
      the number of shares outstanding for each of the issuer’s classes of common
      stock, as of the latest practicable date: 12,063,765 shares of Common Stock
      (par
      value $0.01), was outstanding as of June 29, 2007.





-
          1 -




**ACR
      GROUP, INC. AND SUBSIDIARIES**




**INDEX
      TO QUARTERLY REPORT ON FORM 10-Q**




Page**PART
                  I   FINANCIAL
                  INFORMATION**Item
                  1.
              Unaudited
                  Condensed Consolidated Financial
                  StatementsCondensed
                  Consolidated Balance Sheets – May 31, 2007 and
                  February 28, 2007
              3Condensed
                  Consolidated Income Statements – Three Months Ended
                  May 31, 2007 and 2006
              5Condensed
                  Consolidated Statements of Cash
                  Flows  –Three Months Ended May 31, 2007 and
                  2006
              6Condensed
                Consolidated Statements of Shareholders' Equity -
                May 31, 2007 and February 28, 2007
              7Notes
                  to Condensed Consolidated Financial
                  Statements
              8Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              15Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              22Item
                  4.
              Controls
                  and Procedures
              22**PART
                  II   OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              23Item1A.
              Risk
                  Factors
              23Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              23Item
                  5.
              Other
                  Information
              23Item
                  6.
              Exhibits
              23**SIGNATURES**
              24**CERTIFICATIONS**
              25




-
          2 -
 *Index*




**PART
      I - FINANCIAL INFORMATION**





**Item
      1. – Condensed Consolidated Financial Statements**





**ACR
      GROUP, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(In
      thousands)**


**(Unaudited)**





**ASSETS**





May
                31,
            
            
            February
                28,2007
            
            
            2007Current
                assets:Cash
            
            $
            1,228
            
            
            $
            1,135Accounts
                receivable, net
            
            
            28,089
            
            
            
            23,330Inventories,
                net
            
            
            46,370
            
            
            
            43,516Prepaid
                expenses and other current assets
            
            
            1,772
            
            
            
            1,619Deferred
                income taxes
            
            
            1,702
            
            
            
            1,652Total
                current assets
            
            
            79,161
            
            
            
            71,252Property
                and equipment, net
            
            
            5,534
            
            
            
            5,647Goodwill
            
            
            5,408
            
            
            
            5,408Interest
                derivative asset
            
            
            81
            
            
            
            -Other
                assets
            
            
            869
            
            
            
            853Total
                assets
            
            $
            91,053
            
            
            $
            83,160






The
      accompanying notes are an integral part


of
      these
      condensed consolidated financial statements.




-
          3 -
 *Index*




**ACR
      GROUP, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(In
      thousands)**


**(Unaudited)**





**LIABILITIES
      AND SHAREHOLDERS' EQUITY**





May
                31,
            
            
            February
                28,2007
            
            
            2007Current
                liabilities:Current
                maturities of long-term debt
            
            $
            130
            
            
            $
            131Current
                maturities of capital lease obligations
            
            
            185
            
            
            
            160Accounts
                payable
            
            
            27,237
            
            
            
            23,106Accrued
                expenses and other current liabilities
            
            
            4,928
            
            
            
            5,931Income
                tax payable
            
            
            518
            
            
            
            232Total
                current liabilities
            
            
            32,998
            
            
            
            29,560Long
                term obligations:Borrowings
                under revolving credit agreement
            
            
            27,996
            
            
            
            24,361Long-term
                notes, net of current maturities
            
            
            1,182
            
            
            
            1,214Long-term
                capital lease obligations, net
                of current maturities
            
            
            417
            
            
            
            412Interest
                derivative liability
            
            
            -
            
            
            
            143Deferred
                income taxes
            
            
            271
            
            
            
            184Total
                long-term liabilities
            
            
            29,866
            
            
            
            26,314Commitments
                and contingencies (See Note 9)Shareholders’
                equity:Preferred
                stock, $.01 par value
            
            
            -
            
            
            
            -Common
                stock, $.01 par value
            
            
            121
            
            
            
            121Paid-in
                capital
            
            
            43,362
            
            
            
            43,286Accumulated
                other comprehensive income (loss), net of tax
            
            
            51
            
            
            
            (88
            )Accumulated
                deficit
            
            
            (15,345
            )
            
            
            (16,033
            )Total
                shareholders’ equity
            
            
            28,189
            
            
            
            27,286Total
                liabilities and shareholders’ equity
            
            $
            91,053
            
            
            $
            83,160





The
      accompanying notes are an integral part


of
      these
      condensed consolidated financial statements.





-
          4 -
 *Index*




**ACR
      GROUP, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED INCOME STATEMENTS**


**(In
      thousands, except per share amounts)**


**(Unaudited)**




Three
                Months Ended
              May
                31,2007
            
            
            2006Sales
            
            $
            59,454
            
            
            $
            61,924Cost
                of sales
            
            
            45,013
            
            
            
            46,669Gross
                profit
            
            
            14,441
            
            
            
            15,255Selling,
                general and administrative expenses
            
            
            12,878
            
            
            
            12,305Operating
                income
            
            
            1,563
            
            
            
            2,950Interest
                expense
            
            
            506
            
            
            
            543Interest
                derivative gain
            
            
            -
            
            
            
            (218
            )Other
                non-operating income
            
            
            (142
            )
            
            
            (114
            )Income
                before income taxes
            
            
            1,199
            
            
            
            2,739Provision
                for income taxes
            
            
            371
            
            
            
            1,055Net
                income
            
            $
            828
            
            
            $
            1,684Earnings
                per share:Basic
            
            $
            .07
            
            
            $
            .15Diluted
            
            $
            .07
            
            
            $
            .15Weighted
                average shares outstanding:Basic
            
            
            11,385
            
            
            
            11,215Diluted
            
            
            11,628
            
            
            
            11,478







The
      accompanying notes are an integral part


of
      these
      condensed consolidated financial statements.




-
          5 -
 *Index*




**ACR
      GROUP, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(Unaudited)**





Three
                Months Ended
              May
                31,2007
            
            
            2006Operating
                activities:Net
                income
            
            $
            828
            
            
            $
            1,684Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            284
            
            
            
            231Provision
                for doubtful accounts
            
            
            161
            
            
            
            265Gain
                on sale of assets
            
            
            (2
            )
            
            
            (3
            )Gain
                on change in market value of interest derivative
            
            
            -
            
            
            
            (218
            )Deferred
                income taxes
            
            
            (50
            )
            
            
            (33
            )Amortization
                of unearned restricted stock compensation
            
            
            131
            
            
            
            118Tax
                benefit from restricted stock compensation
            
            
            178
            
            
            
            95Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (4,920
            )
            
            
            (7,086
            )Inventories,
                net
            
            
            (2,854
            )
            
            
            (9,970
            )Prepaids
                and other assets
            
            
            (168
            )
            
            
            117Accounts
                payable
            
            
            4,131
            
            
            
            2,736Accrued
                expenses and other liabilities:
            
            
            (1,089
            )
            
            
            1,127Net
                cash used in operating activities
            
            
            (3,370
            )
            
            
            (10,937
            )Investing
                activities:Purchases
                of property and equipment
            
            
            (171
            )
            
            
            (355
            )Receipts  on
                derivative instrument
            
            
            -
            
            
            
            16Proceeds
                from disposition of assets
            
            
            2
            
            
            
            6Net
                cash used in investing activities
            
            
            (169
            )
            
            
            (333
            )Financing
                activities:Net
                borrowings  on revolving credit agreement
            
            
            3,634
            
            
            
            11,517Proceeds
                from exercise of stock options
            
            
            -
            
            
            
            35Payments
                on long-term debt and capital lease obligations
            
            
            (2
            )
            
            
            (70
            )Net
                cash provided by  financing activities
            
            
            3,632
            
            
            
            11,482Net
                increase in cash
            
            
            93
            
            
            
            212Cash
                at beginning of period
            
            
            1,135
            
            
            
            1,275Cash
                at end of period
            
            $
            1,228
            
            
            $
            1,487






The
      accompanying notes are an integral part


of
      these
      condensed consolidated financial statements





-
          6 -
 *Index*




**ACR
      GROUP, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


**(In
      thousands, except shares)**


**(Unaudited)**






**Accumulated****Other****#
                    Shares**
                
                
                **Par**
                
                
                **Paid-in**
                
                
                **Comprehensive**
                
                
                **Accumulated****Outstanding**
                
                
                **Value**
                
                
                **Capital**
                
                
                **Income
                    (Loss)**
                
                
                **Deficit**
                
                
                **Total****Balance,
                    02/28/07**
                
                ****
                **12,113,078**
                
                
                ****
                **121**
                
                
                ****
                **43,286**
                
                
                ****
                **(88**
                **)**
                
                ****
                **(16,033**
                **)**
                
                ****
                **27,286**Adoption
                    of FIN No. 48
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                ****
                **(140**
                **)**
                
                ****
                **(140**
                **)**Issuances
                    net of shares of Restricted Stock
                
                ****
                **(49,313**
                **)**
                
                
                
                
                
                ****
                **(235**
                **)**
                
                
                
                
                
                
                
                
                
                ****
                **(235**
                **)**Restricted
                    stock compensation -
                
                
                
                
                
                
                
                
                
                ****
                **132**
                
                
                
                
                
                
                
                
                
                
                ****
                **132**Tax
                    benefit from stock-based compensation
                
                
                
                
                
                
                ****
                **178**
                
                
                
                
                
                
                
                
                
                
                ****
                **178**Comprehensive
                    Income:Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                ****
                **828**
                
                
                ****
                **828**Other
                    Comprehensive Income, change in fair value market of interest
                    derivative,
                    net of tax
                
                ****
                
                
                
                ****
                
                
                
                ****
                
                
                
                ****
                **139**
                
                
                
                
                
                
                ****
                **139**Comprehensive
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                ****
                **967****Balance,
                    5/31/07**
                
                ****
                **12,063,765**
                
                
                ****
                **121**
                
                
                ****
                **43,361**
                
                
                ****
                **51**
                
                
                ****
                **(15,345**
                **)**
                
                ****
                **28,188**






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


-
          7 -
 *Index*




**ACR
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





1
      -           Basis of
      Presentation





The
      accompanying condensed consolidated balance sheet as of February 28, 2007,
      which
      has been derived from ACR Group, Inc. and its subsidiaries (collectively
      referred to as the “Company”) audited consolidated financial statements, and the
      May 31, 2007 unaudited interim condensed consolidated financial statements,
      have
      been prepared in accordance with the rules and regulations of the Securities
      and
      Exchange Commission applicable to interim financial information. Certain
      information and note disclosures normally included in the annual financial
      statements prepared in accordance with generally accepted accounting principles
      in the United States have been condensed or omitted pursuant to those rules
      and
      regulations, although we believe the disclosures made are adequate to make
      the
      information presented not misleading.  In the opinion of management,
      all adjustments, consisting of only normal recurring adjustments, necessary
      for
      a fair presentation have been included in the condensed consolidated financial
      statements herein.  Actual operating results for the three months
      ended May 31, 2007, are not necessarily indicative of the results that may
      be
      expected for the fiscal year ended February 29, 2008. The condensed consolidated
      financial statements included herein should be read in conjunction with the
      audited financial statements and notes thereto included in the Company’s Annual
      Report on Form 10-K for the fiscal year ended February 28, 2007.





Use
      of
      Estimates




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





Accounting
      Change





Prior
      to
      March 1, 2007, the Company recognized income tax accruals with respect to
      uncertain tax positions based upon Statement of Financial Accounting Standards
      (“SFAS”) No. 5, “Accounting for Contingencies.” Under SFAS No. 5, a
      liability was recorded (including interest and penalties) associated with an
      uncertain tax position if the liability was both probable and
      estimable.





Effective
      March 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
      Taxes—an interpretation of FASB Statement No. 109,” which clarifies the
      accounting for uncertainty in income taxes recognized in financial statements
      in
      accordance with SFAS No. 109, “Accounting for Income Taxes” and requires
      expanded disclosure with respect to the uncertainty in income taxes. This
      Interpretation seeks to reduce the diversity in practice associated with certain
      aspects of measurement and recognition in accounting for income
      taxes.





The
      Company is subject to U.S. federal income tax and to income tax of multiple
      state jurisdictions and is subject to tax audits in the various jurisdictions
      until the respective statutes of limitations expire. The Company is no
      longer subject to U.S. federal tax examinations for tax years prior to
      2003. For the majority of states, we are no longer subject to tax
      examinations for tax years before 2002. In connection with our adoption of
      FIN
      No. 48, we analyzed the filing positions in all of the federal and state
      jurisdictions where we are required to file income tax returns, as well as
      all
      open tax years in these jurisdictions. The Company recorded the cumulative
      effect of change in accounting principle as a decrease  to beginning
      balance of retained earnings related to uncertain state income tax positions
      in
      the amount of $140,000 based upon the adoption of FIN No. 48 on
      March 1, 2007. Prior to March 1, 2007 the Company had no reserve for such
      tax positions.





-
          8 -
 *Index*




Reclassifications




Certain
      reclassifications of prior period statements have been made to conform to
      current reporting practices.




2
      -           
Significant Accounting Policies





Interest
      Rate Derivative Instruments





The
      Company utilizes interest rate derivative instruments (swap agreements) to
      reduce the exposure to market risks from changing interest rates under the
      revolving bank debt. The swap agreements qualify as cash flow hedges and the
      Company applies the provisions of SFAS No. 133, Accounting for Derivative
      Instruments and Hedging Activities,” which establishes accounting and reporting
      standards for derivative instruments.





These
      interest rate swap agreements result in the Company paying or receiving the
      difference between the fixed rate of the swaps and the floating rate of debt
      at
      specified intervals calculated based on the notional amounts.  The
      difference received or paid on the interest rate swap agreements are recognized
      as adjustments to interest expense over the life of the swaps and impact the
      effective interest rate on the Company’s debt. The effective portions of changes
      in the fair value of the derivatives are recorded in other comprehensive loss,
      net of tax, and are recognized in the income statement when the hedged items
      affect earnings. Ineffective portions of changes in the fair value of cash
      flow
      hedges are recognized in earnings




Derivative
      instruments are recorded on the balance sheet at fair value as either assets
      or
      liabilities. The Company’s designated hedge transactions have been cash-flow
      hedges. For cash-flow hedge transactions, the effective portion of the changes
      in fair value of derivatives are reported as other comprehensive income or
      loss
      and are recognized in current earnings in the period or periods during which
      the
      hedged transaction effects current earnings.





Amounts
      excluded from hedge effectiveness calculation and any ineffective portions
      of
      the change in fair value of the derivative of a cash-flow hedge are recognized
      in current earnings. For a derivative to qualify as a hedge at inception and
      throughout the hedged period, the Company formally documents the nature and
      relationships between the hedging instruments and hedged items. The Company
      also
      documents its risk-management objectives, strategies for undertaking interest
      rate hedge transactions and method of assessing hedge effectiveness. Financial
      instruments qualifying for hedge accounting must maintain a specified level
      of
      effectiveness between the hedge instrument and the item being hedged, both
      at
      inception and
      throughout the hedged period. Derivative instruments are approved by our board
      of directors in accordance with our risk management policy. The Company does
      not
      use such instruments for trading or speculative purposes.





-
          9 -
 *Index*




Comprehensive
      Income





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





The
        following table provides comprehensive income for the periods
        indicated:
 Three
                  Months EndedMay
                  31,2007
              
              
              2006Net
                  income
              
              $
              828
              
              
              $
              1,684Other
                  comprehensive gain, net of tax
              
              
              139
              
              
              
              -Comprehensive
                  income
              
              $
              967
              
              
              $
              1,684
  For
        a
        description of our other significant accounting policies, refer to Note 1
        of the
        Notes to Consolidated Financial Statements included in the Company’s Annual
        Report on Form 10-K for the year ended February 28,
        2007.





3
      -           Goodwill





Goodwill
      represents the excess cost of
      companies acquired over the fair value of their tangible net assets. TheCompany accounts for
      goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”.
      Goodwill is tested for impairment by comparing the fair value of the reporting
      unit with its carrying value. The impairment test is required to be performed
      at
      least annually and is conducted at the consolidated group level (the reporting
      unit) for the Company. On an ongoing basis, absent any event or change in
      circumstances that would more likely than not reduce the fair value of the
      reporting unit below its carrying amount, the Company will perform the annual
      impairment test as of the end of its fiscal year.





4
      -           Interest
      Rate Derivative Instruments





The
      Company utilizes interest rate derivative instruments (swap agreements) to
      enhance its ability to manage the risks associated with fluctuations in interest
      rates, which exist as part of the Company’s ongoing business
      operations.





At
      May
      31, 2007 the Company had two notional amount $10 million swap agreements in
      effect that quality for hedge accounting treatment. The first $10 million
      notional value swap agreement matures in 2009 and exchanges 30-day LIBOR
      variable rates with a fixed interest rate payment of 5.04%. The second
      swap agreement with a notional value of $10 million, matures in 2011, and
      exchanges 30-day LIBOR variable rates with a fixed interest rate of
      5.07%.  At May 31, 2007, both interest rate swaps were effective as
      cash flow hedges and no charge to earnings was required. The Company recognized
      a gain in accumulated other comprehensive income in the amount of $139,000,
      net
      of income tax of $85,000.





-
          10 -
 *Index*




At
      May
      31, 2006 the Company had one notional amount $15 million in effect that did
      not
      qualify for hedge accounting treatment in accordance with SFAS 133, “Accounting
      for Derivative Instruments and Hedging Activities.” This swap agreement was
      terminated on October 31, 2006 and had a notional amount of $15 million and
      paid
      a fixed rate of 4.38%.  The fair value of this derivative instrument
      was reflected on the Company’s balance sheet, and changes in the fair value of
      the derivative were recorded in the Company’s income statements as an interest
      derivative gain.  For the three months ended May 31, 2006, the Company
      recorded a gain on the income statement of $218,000.





5
      -           Debt




The
        Company has a credit arrangement
        with a commercial bank (“Agreement”) that provides for both a revolving credit
        facility of $45 million and a $5 million credit line that may be used for
        capital expenditures or to purchase real estate.  The Agreement
        matures in August 2008.   The amount that may be borrowed under
        the revolving credit facility is limited to a borrowing base consisting of
        85%
        of eligible accounts receivable, and from 50% to 65% of eligible inventory,
        depending on the time of year.  At March 31, 2007, our available
        credit under the revolver was $11.4 million, and we were in compliance with
        all
        financial and non-financial loan covenants.


As
      of May 31, 2007, the Company had
      outstanding borrowings of $28.0 on the revolving credit line and $605,000 under
      the capital expenditure facility. In addition, the Company had an outstanding
      letter of credit for $926,000 against the line of credit.  Borrowings
      under both facilities bear interest based on the prime rate or LIBOR, plus
      a
      spread that is dependent on the Company’s financial performance.  As
      of May 31, 2007, the applicable interest rate on both facilities was the prime
      rate or LIBOR plus 1.125%, and the Company had elected the LIBOR option (5.375%
      at May 31, 2007) for most amounts outstanding under the
      facilities.  The average interest rate on the Company’s borrowings
      from the bank at May 31, 2007 was 6.42%





6
      -           Shareholders’
Equity





Restricted
      Stock Awards





The
      Chief
      Financial Officer and the General Counsel of the Company have employment
      contracts that each provide for the contingent issuance of 500,000 shares of
      restricted stock upon continuation of employment. Under the agreements, the
      restricted stock vests ratably over six years beginning March 1, 2004. For
      the
      three months ended May 31, 2007, compensation expense recognized under the
      agreements was $90,000.





Effective
      March 1, 2004, two of the outside directors of the Company each received
      restricted stock grants of 42,000 shares, subject to continuation of service
      as
      a director for four years. Additionally, effective August 18, 2005, another
      outside director of the Company received 25,000 shares, subject to continuation
      of service as a director for four years.  Such shares vest annually
      pro-rata over such period. For
      the
      three months ended May 31, 2007, the Company recognized $12,000 as compensation
      expense respectively related to the directors restricted stock
      grants.





-
          11 -
 *Index*




Effective
      June 1, 2005, the Company issued 25,000 shares of restricted stock to a
      non-officer, subject to continuation of employment. Additionally, effective
      April 15, 2006, the Company issued 135,000 shares to non-officer employees,
      subject to continuation of employment.  Such shares vest annually
      pro-rata over a five-year period. For the three months ended May 31, 2007,
      the
      Company recognized $30,000 as compensation expense related to such restricted
      stock grants.





In
      March
      and April 2007, the Company acquired shares of the Company’s stock in connection
      with employee restricted stock grants, whereby Company shares were tendered
      by
      employees for the payment of applicable statutory withholding taxes at the
      date
      of vesting. During the three month period ended May 31, 2007 the Company
      acquired 49,313 shares at a cost of $235,000 The Company subsequently retired
      such shares acquired.




7
      -           Income
      Taxes





The
      Company and its subsidiaries file a
      consolidated federal income tax return.  The Company uses the
      liability method in accounting for income taxes.  Under the liability
      method, deferred tax assets and liabilities are determined based on differences
      between financial reporting and tax bases of assets and liabilities and are
      measured using the enacted tax rates and laws that will be in effect when the
      differences are expected to reverse.  The Company establishes a
      valuation allowance when necessary to reduce deferred tax assets to the amount
      expected to be realized. The Company recorded a cumulative effect of change
      in accounting principle as a result of implementing FIN No. 48 by reducing
      the
      balance of beginning retained earnings by $140,000 at March 1,
      2007.





8
      -           Earnings
      Per Share





Basic
      earnings per share of common stock is computed by dividing net income by the
      weighted-average number of shares of common stock outstanding during the period,
      including the vested restricted shares. Diluted earnings per share adjusts
      for
      the dilutive effects of unvested shares of restricted stock using the treasury
      stock method.





The
      Company has no outstanding stock options to include in the diluted earnings
      per
      share calculation for the three months ended May 31, 2007.





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




Three
                Months
              Ended
                May 31,2007
            
            
            2006(In
                thousands)Weighted-average
                basic common shares outstanding
            
            
            11,385
            
            
            
            11,215Effect
                of dilutive securities:Unvested
                restricted stock
            
            
            243
            
            
            
            263Weighted-average
                dilutive common shares outstanding
            
            
            11,628
            
            
            
            11,478





-12-
 *Index*




9
                -
            Commitments
                and Contingencies




The
      Company has an arrangement with a heating, air conditioning and refrigeration
      (“HVAC”) equipment manufacturer and a bonded warehouse agent whereby HVAC
      equipment is held for sale in bonded warehouses located at the premises of
      certain of the Company's operations, with payment due only when products are
      sold.  The supplier retains legal title and substantial management
      control with respect to the consigned inventory.  The Company is
      responsible for damage to and loss of inventory that may occur at its
      premises.  The Company has the ability to return consigned inventory,
      at its sole discretion, to the supplier for a specified period of time after
      receipt of the inventory.  Such inventory is accounted for as
      consigned merchandise and is not recorded on the Company's balance
      sheet.  As of May 31, 2007 and February 28, 2007, the cost of such
      inventory held in the bonded warehouses was approximately $3,994,000 and
      $6,278,000 respectively.





The
      Company is subject to various legal
      proceedings in the ordinary course of business.  The Company
      vigorously defends all matters in which it is named as a defendant and, for
      insurable losses, maintains significant levels of insurance to protect against
      adverse judgments, claims or assessments. In management’s opinion, although the
      adequacy of existing insurance coverage or the outcome of any legal proceedings
      may not be predicted with certainty, the ultimate liability associated with
      any
      claims or litigation in which the Company is involved will not have a material
      effect on the financial condition or results of operations.





The
      Company leases its corporate
      offices, office and warehouse space occupied by its HVAC operations, office
      equipment and various vehicles under non-cancelable operating lease agreements
      that expire at various dates through 2017.





The
      Company is self-insured for various levels of general liability, workers’
compensation, vehicle, and employee medical coverage. The level of exposure
      from
      catastrophic events is limited by stop-loss and aggregate liability reinsurance
      coverage. When estimating the self-insurance liabilities and


related
      reserves, the Company consider a number of factors, which include historical
      claims experience, demographic factors and severity factors.





If
      actual
      claims or adverse development of loss reserves occurs and exceed these
      estimates, additional reserves may be required that could materially impact
      the
      consolidated results of operations. The estimation process contains uncertainty
      since management must use judgment to estimate the ultimate cost that will
      be
      incurred to settle reported claims and unreported claims for incidents incurred
      but not reported as of the balance sheet date. At May 31, 2007 and February
      28,
      2007, approximately $1,246,000 and $1,163,000 of reserves was established
      related to all insurance programs, respectively. The Company’s participation in
      a captive self-insurance program began in fiscal year 2006 for all coverage
      except employee medical coverage.  Reserves associated with the newer
      coverage will build until the Company has established three years of claims
      experience.  Once this experience has been established, then reserve
      balances will only be materially affected by significant claims.





10.
      -        Recently Issued Accounting
      Standards




In
      February 2007, the Financial
      Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows
      entities the option to measure eligible financial instruments at fair value
      as
      of specified dates. Such election, which may be applied on an
      instrument-by-instrument basis, is typically irrevocable once elected. SFAS No. 159
      is effective for fiscal years beginning after November 15, 2007, and early
      application is allowed under certain circumstances. The Company does not expect
      the adoption of SFAS No. 159 to have a material impact on the consolidated
      financial statements.




-
          13 -
 *Index*




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
This Statement defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles and expands disclosures about
      fair value measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim
      periods within those fiscal years. The provisions of SFAS No. 157 are
      effective for us beginning January 1, 2008. The Company does not expect the
      adoption of SFAS No. 157 to have a material impact on the consolidated
      financial statements.





11.
      -        Subsequent
      Event





On
      July
      3, 2007, the Company entered into an Agreement and Plan of Merger, dated as
      of
      July 3, 2007, with Watsco, Inc., a Florida corporation, and its wholly owned
      subsidiary, Coconut Grove Holdings, Inc., a Texas corporation. The merger
      agreement provides for transactions that, if consummated, will cause a change
      of
      control of the Company and ultimately lead to our becoming a wholly owned
      subsidiary of Watsco.





Under
      the
      terms of the merger agreement, Watsco's acquisition subsidiary will commence
      a
      tender offer for all of our outstanding shares of common stock, par value $0.01
      per share, other than shares held by Company officers that are being acquired
      by
      Watsco following the tender offer under the officers' support agreements, at
      a
      price of $6.75 per share in cash. Watsco's obligation to purchase our shares
      in
      the tender offer is subject to certain conditions, including but not limited
      to
      the number of tendered Company shares and the shares purchased under the
      officers' support agreements being at least 66 2/3% of the Company’s outstanding
      shares, subject to a reduction of the minimum amount in certain circumstances.
      Under the merger agreement, following the completion of the tender offer and
      the
      satisfaction or waiver of certain other conditions, Watsco's acquisition
      subsidiary will be merged into the Company, with ACR Group, Inc. being the
      surviving corporation. In the merger, each outstanding share of our common
      stock
      (other than shares we hold in treasury, certain restricted shares held by
      employees of the Company that will be converted into a proportional number
      of
      shares of Watsco restricted stock, or shares that Watsco or its affiliates
      hold
      following completion of the tender offer) will be converted into the right
      to
      receive the same cash amount per share as the tender offer price. Under the
      merger agreement, the obligation of Watsco or its acquisition subsidiary to
      consummate the offer and both our and Watsco's obligations to effect the merger
      are conditioned on regulatory approvals and other customary conditions. The
      merger agreement contains certain termination rights and provides that, upon
      the
      termination of the merger agreement under specified circumstances, the Company
      would be required to pay Watsco a termination fee of $5,000,000.




-
          14 -
 *Index*




**Item
      2. - Management's Discussion and Analysis of Financial Condition
      and Results of Operations**





**INTRODUCTION**








**INTRODUCTION**





ACR
      Group, Inc. and its subsidiaries
      (collectively, the “Company”) is an independent distributor of heating, air
      conditioning and refrigeration (“HVAC”) equipment and related parts and
      supplies. The Company is among the ten largest such distributors in the United
      States.   As of May 31, 2007, the Company had 54 branch
      operations, organized geographically into five business units.  In the
      past twelve months, we have opened three branches, all of which are in Arizona.
      Generally accepted accounting principles allow the aggregation of an
      enterprise’s segments if they are similar.  Although the Company
      operates in different geographic areas, we have reviewed the aggregation
      criteria and determined that the Company operates as a single segment based
      on
      the high degree of similarity of the Company’s operations.





Substantially
      all of our sales are to
      contractor dealers who service and install HVAC systems and to institutional
      end-users.Much of the HVAC industry is seasonal; sales of HVAC equipment and
      service are generally highest during the times of the year when climatic
      conditions require the greatest use of such systems. Because of our geographic
      concentration in the Sunbelt, our sales of air conditioning products are
      substantially greater than of heating products. Likewise, our sales volume
      is
      highest in the summer months when air conditioning use is greatest. Accordingly,
      our revenues are highest in our second fiscal quarter ending August 31, and
      our
      revenues are lowest in our fourth quarter ending the last day of February.
      Sales
      of HVAC products for new construction are less seasonal and are more dependent
      on economic factors affecting housing starts.






**MATERIAL
      SUBSEQUENT EVENT**





On
      July
      3, 2007, the Company entered into an Agreement and Plan of Merger, dated as
      of
      July 3, 2007, with Watsco, Inc., a Florida corporation, and its wholly owned
      subsidiary, Coconut Grove Holdings, Inc., a Texas corporation. The merger
      agreement provides for transactions that, if consummated, will cause a change
      of
      control of the Company and ultimately lead to our becoming a wholly owned
      subsidiary of Watsco.





Under
      the
      terms of the merger agreement, Watsco's acquisition subsidiary will commence
      a
      tender offer for all of our outstanding shares of common stock, par value $0.01
      per share, other than shares held by Company officers that are being acquired
      by
      Watsco following the tender offer under the officers' support agreements, at
      a
      price of $6.75 per share in cash. Watsco's obligation to purchase our shares
      in
      the tender offer is subject to certain conditions, including but not limited
      to
      the number of tendered Company shares and the shares purchased under the
      officers' support agreements being at least 66 2/3% of the Company’s outstanding
      shares, subject to a reduction of the minimum amount in certain circumstances.
      Under the merger agreement, following the completion of the tender offer and
      the
      satisfaction or waiver of certain other conditions, Watsco's acquisition
      subsidiary will be merged into the Company, with ACR Group, Inc. being the
      surviving corporation. In the merger, each outstanding share of our common
      stock
      (other than shares we hold in treasury, certain restricted shares held by
      employees of the Company that will be converted into a proportional number
      of
      shares of Watsco restricted stock, or shares that Watsco or its affiliates
      hold
      following completion of the tender offer) will be converted into the right
      to
      receive the same cash amount per share as the tender offer price. Under the
      merger agreement,
      the obligation of Watsco or its acquisition subsidiary to consummate the offer
      and both our and Watsco's obligations to effect the merger are conditioned
      on
      regulatory approvals and other customary conditions. The merger agreement
      contains certain termination rights and provides that, upon the termination
      of
      the merger agreement under specified circumstances, the Company would be
      required to pay Watsco a termination fee of $5,000,000.





-
          15 -
 *Index*




**RESULTS
      OF OPERATIONS**





The
      following table summarizes
      information derived from the condensed consolidated income statements expressed
      as a percentage of sales for the three months ended May 31, 2007 and
      2006:





Three
                Months EndedMay
                31,2007
            
            2006Sales
            100.0%
            
            100.0%Cost
                of sales
            75.7%
            
            75.4%Gross
                profit
            24.3%
            
            24.6%Selling,
                general and administrative expenses
            21.7%
            
            19.8%Operating
                income
            2.6%
            
            4.8%Interest
                expense
            0.9%
            
            0.9%Interest
                derivative loss (gain)
            0.0%
            
            (0.3)%Other
                non-operating income
            (0.3)%
            
            (0.2)%Income
                before income taxes
            2.0%
            
            4.4%Income
                taxes
            0.6%
            
            1.7%Net
                income
            1.4%
            
            2.7%




**QUARTER
      ENDED MAY 31, 2007 COMPARED TO THE QUARTER ENDED MAY 31,
      2006**





The
      Company earned net income of
      $828,000 ($0.07 per share) for the quarter ended May 31, 2007 (fiscal 2008)
      compared to $1,684,000 ($0.15 per share) for the quarter ended May 31, 2006
      (fiscal 2007), a decline of 51%.   A general decline in business
      activity in fiscal 2008, compared to fiscal 2007, which has impacted all of
      the
      HVAC distribution industry, adversely affected our results of operations in
      the
      first quarter of fiscal 2008.  Such decline in activity is a product
      of both a steep decline in residential housing starts that has occurred in
      most
      our trade areas and cooler than normal weather conditions that diminished demand
      for air conditioning products.   Net income in the first quarter
      of fiscal 2007 was also enhanced by gain of $218,000 from an increase in the
      fair market value of an interest rate swap agreement.  In addition,
      pre-tax loss associated with the new Arizona branches was approximately $200,000
      in the quarter ended May 31, 2007.





Consolidated
      sales decreased 4% to
      $59.5 million during the quarter ended May 31, 2007, compared to $61.9 million
      in the quarter ended May 31, 2006. Same-store sales, which exclude the three
      branches in Arizona opened after the first quarter of fiscal 2007, decreased
      7%
      in the first quarter of fiscal 2008 from the first quarter of fiscal
      2007.  The sales decline was greatest in trade areas such as Florida
      and Nevada that had experienced a high rate of growth in recent years from
      an
      economic boom in residential construction.





The
      Company's consolidated gross margin
      percentage on sales was 24.3% for the quarter ended May 31, 2007, compared
      to
      24.6% for the quarter ended May 31, 2006.  In general, competition for
      a reduced volume of business led to a compression of selling margins. In
      addition, most of the decline in our sales volume to the new construction
      segment of the HVAC industry related to the sales of installation supplies,
      from
      which we usually generate higher selling margins that from the sale of HVAC
      equipment.





Selling,
      general and administrative
      ("SG&A") expenses increased by 5% in the quarter ended May 31, 2007,
      compared to the same period of 2006.  Same-store SG&A expenses
      increased 3% compared to the preceding year.  Expressed as a
      percentage of sales, SG&A expenses increased to 21.7% of sales in the first
      quarter of fiscal 2008, compared to 19.9% in the first quarter of fiscal
      2007.





Interest
      expense decreased 7% in the
      quarter ended May 31, 2007, compared to the quarter ended May 31, 2006 because
      of lower levels of funded debt in the current fiscal year.  Average
      funded indebtedness decreased 9% in the quarter ended May 31, 2007, compared
      to
      the preceding year, as the Company has used cash flow generated from operations
      during the past twelve months to reduce indebtedness.





In
      the quarter ended May 31, 2006, the
      Company recorded a gain of $218,000 from an increase in the market value of
      an
      interest rate swap agreement.  The swap agreement did not qualify for
      hedge accounting and, accordingly, changes in the fair value of the instrument
      were recorded in income.  In October 2006, the Company terminated the
      swap agreement and entered into two other swap agreements that qualify for
      hedge
      accounting at inception of the contracts.  Accordingly, changes in
      market value of the new contracts are accounted for as items of other
      comprehensive income or loss and are reflected only in the Company’s balance
      sheet.





The
      Company estimated a combined
      federal and state income tax rate of 30.9% for the quarter ended May 31, 2007,
      compared to 38.5% in the same quarter of 2006.  The effective tax rate
      for the quarter ended May 31, 2007 includes the reduction of state income tax
      accruals in Texas as a result of new corporate income tax laws.





-
          17 -
 *Index*





**LIQUIDITY
      AND CAPITAL RESOURCES**





In
      the quarter ended May 31, 2007, the
      Company used $3.4 million of cash flow in operations, compared to using $10.9
      million in the same period of 2006.  In fiscal 2008, in light of our
      expectation of continued slack demand compared to fiscal 2007, we reduced the
      customary buildup of inventory that usually precedes our summer selling season.
      In addition, lower sales volume has resulted in lower working capital
      requirements for customer accounts receivable. Gross accounts receivable
      represented 42 days of gross sales as of both May 31, 2007, compared to 41
      days
      at May 31, 2006.  Inventory at May 31, 2007 was $1.9 million less than
      at May 31, 2006.   In the first quarter of fiscal 2007, in
      settlement of litigation with a supplier, the Company also paid $2.7 million
      for
      inventory that was included in accounts payable as of February 28,
      2006.





The
      Company has a credit arrangement
      with a commercial bank (“Agreement”) that provides for both a revolving credit
      facility of $45 million and a $5 million credit line that may be used for
      capital expenditures or to purchase real estate.  The Agreement
      matures in August 2008.   The amount that may be borrowed under
      the revolving credit facility is limited to a borrowing base consisting of
      85%
      of eligible accounts receivable, and from 50% to 65% of eligible inventory,
      depending on the time of year.  At March 31, 2007, our available
      credit under the revolver was $11.4 million, and we were in compliance with
      all
      financial and non-financial loan covenants.





As
      of May 31, 2007, the Company had
      outstanding borrowings of $27,996,000 on the revolving credit line and $605,000
      under the capital expenditure facility. In addition, the Company had an
      outstanding letter of credit for $926,000 against the line of credit. Borrowings
      under both facilities bear interest based on the prime rate or LIBOR, plus
      a
      spread that is dependent on the Company’s financial performance.  As
      of May 31, 2007, the applicable interest rate on both facilities was the prime
      rate or LIBOR plus 1.125% and the Company had elected the LIBOR option
      (5.375% at May 31, 2007) for most amounts outstanding under the
      facilities.  The average interest rate on the Company’s borrowings
      from the bank at May 31, 2007 was 6.42%.





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





As
      described above,
      most of the Company’s indebtedness bears interest at variable
      rates.  In addition, borrowings under the revolving credit line
      fluctuate.  In October 2006, the Companyentered into two
      interest rate swap agreements totaling $20 million whereby the Company has
      agreed to exchange, at monthly intervals, the difference between the fixed
      rates
      of 5.04% and 5.07% and LIBOR, amounts as calculated by reference to a notional
      principal amount of $10 million on each swap agreement.  The interest
      rate swaps mature in November 2009 and 2011, respectively.








**CRITICAL
      ACCOUNTING POLICIES**





The
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States requires management to make assumptions
      and estimates that affect reported amounts and related disclosures. Actual
      results, once known, may vary from these estimates. Management
      based its estimates on historical experience, current trends and other factors
      that are believed to be reasonable under the circumstances.





-
          18 -
 *Index*




Management
      believes that the following accounting policies require a higher degree of
      judgment in making its estimates and, therefore, are critical accounting
      policies.


Allowance
      for Doubtful Accounts





The
      Company records an allowance for doubtful accounts for estimated losses
      resulting from the inability to collect accounts receivable from customers.
      The
      Company establishes the allowance based on historical experience, credit risk
      of
      specific customers and transactions, and other factors. Management believes
      that
      the lack of customer concentration is a significant factor that mitigates the
      Company’s accounts receivable credit risk. Two customers represented 6% and 2%
      of consolidated fiscal 2007 sales, respectively, and no other customer comprised
      as much as 1% of sales. The number of customers and their distribution across
      the geographic areas served by the Company help to reduce the Company’s credit
      exposure to a single customer or to economic events that affect a particular
      geographic region.  At May 31, 2007, and February 28, 2007, the
      allowance for doubtful accounts totaled $1,250,000 and $1,090,000, respectively.
      This increase is explained by the Company’s more conservative credit posture in
      light of a slowdown in the housing market in general and increased reserves
      for
      identified credit exposure. Although the Company believes that its allowance
      for
      doubtful accounts is adequate, any future condition that would impair the
      ability of a broad section of the Company’s customer base to make payments on a
      timely basis may require the Company to record additional
      allowances.


Inventories





Inventories
      consist of HVAC equipment, parts and supplies and are valued at the lower of
      cost or market value using the moving average cost method. At May 31, 2007,
      all
      inventories represented finished goods held for sale. When necessary, the
      carrying value of obsolete or excess inventory is reduced to estimated net
      realizable value. The process for evaluating the value of obsolete or excess
      inventory requires estimates by management concerning future sales levels and
      the quantities and prices at which such inventory can be sold in the ordinary
      course of business.





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





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





Vendor
      Rebates





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





-
          19 -
 *Index*




Goodwill





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




Self-Insurance
      Reserves





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





Interest
      Rate Derivative Instruments




The
      Company uses derivative financial instruments to mitigate interest rate risk.
      Derivative instruments are recorded on the balance sheet at fair value as either
      assets or liabilities. To date, our designated hedge transactions have been
      cash-flow hedges. For cash-flow hedge transactions, the effective portion of
      the
      changes in fair value of derivatives are reported as other comprehensive income
      or loss and are recognized in current earnings in the period or periods during
      which the hedged transaction effects current earnings. Amounts excluded from
      hedge effectiveness calculation and any ineffective portions of the change
      in
      fair value of the derivative of a cash-flow hedge are recognized in current
      earnings. For a derivative to qualify as a hedge at inception and throughout
      the
      hedged period, we formally document the nature and relationships between the
      hedging instruments and hedged items. We also document our risk-management
      objectives, strategies for undertaking interest rate hedge transactions and
      method of assessing hedge effectiveness. Financial instruments qualifying for
      hedge accounting must maintain a specified level of effectiveness between the
      hedge instrument and the item being hedged, both at inception and throughout
      the
      hedged period. The board of directors approves derivative instruments and the
      company does not use such instruments for trading or speculative
      purposes.





Accounting
      Change




Effective
      March 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
      Taxes—an interpretation of FASB Statement No. 109,” which clarifies the
      accounting for uncertainty in income taxes recognized in financial
      statements in accordance with SFAS No. 109, “Accounting for Income Taxes”
and requires expanded disclosure with respect to the uncertainty in income
      taxes. This Interpretation seeks to reduce the diversity in practice associated
      with certain aspects of measurement and recognition in accounting for income
      taxes.





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          20 -
 *Index*




The
      Company is subject to U.S. federal income tax and to income tax of multiple
      state jurisdictions and is subject to tax audits in the various jurisdictions
      until the respective statutes of limitations expire. The Company is no
      longer subject to U.S. federal tax examinations for tax years prior to
      2003. For the majority of states, we are no longer subject to tax
      examinations for tax years before 2002. In connection with our adoption of
      FIN
      No. 48, we analyzed the filing positions in all of the federal and state
      jurisdictions where we are required to file income tax returns, as well as
      all
      open tax years in these jurisdictions. The Company recorded an accrual for
      uncertain state income tax positions in the amount of $140,000 based upon the
      adoption of FIN No. 48 on March 1, 2007.





Information
      about Forward-Looking Statements




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




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




•
            general
                economic conditions affecting general business
                spending,




•
            consumer
                spending,




•
            consumer
                debt levels,




•
            prevailing
                interest rates,




•
            seasonal
                nature of product sales,




•
            changing
                rates of new housing starts,




•
            weather
                conditions,




•
            effects
                of supplier concentration,




•
            competitive
                factors within the HVAC industry,




•
            insurance
                coverage risks,




•
            change
                in control of the company,




•
            viability
                of the Company’s business strategy.




In
      light
      of these uncertainties, there can be no assurance that the forward-looking
      information contained herein will be realized or, even if substantially
      realized, that the information will have the expected consequences to or effects
      on the Company or its business or operations. For additional information
      identifying some other important factors which may affect the Company’s
      operations and could
      cause actual results to vary materially from those anticipated in the
      forward-looking statements, see our Securities and Exchange Commission filings,
      including but not limited to, the discussion included in the Risk Factors
      section of the Company’s February 28, 2007 Annual Report on Form 10-K under the
      headings “General Risk Factors” and “Business Risk
      Factors”.  Forward-looking statements speak only as of the date the
      statement was made. The Company assumes no obligation to update forward-looking
      information or the discussion of such risks and uncertainties to reflect actual
      results, changes in assumptions or changes in other factors affecting
      forward-looking information.




-
          21 -
 *Index*




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





The
      Company is subject to market risk exposure related to changes in interest rates
      on its bank credit facility, which includes revolving credit and term notes.
      These instruments carry interest at a pre-agreed upon percentage point spread
      from either the prime interest rate or LIBOR. The Company may, at its option,
      fix the interest rate for borrowings under the facility based on a spread over
      LIBOR for 30 days to 90 days. At May 31, 2007 the Company had $28.0 million
      outstanding under its bank credit facility, of which $8.0 million is subject
      to
      variable interest rates. Based on this balance, an immediate change of one
      percent in the interest rate would cause a change in interest expense of
      approximately $54,000 or $.00 per basic share, net of income tax, on an annual
      basis. The Company has two interest rate derivative instruments for a notional
      amount of $10 million each that expire in October 2009 and October 2011. The
      instruments fix LIBOR at 5.04% and 5.07%, respectively, on the notional
      amounts.





**Item
      4. - Controls and Procedures**




The
      Company performed an evaluation of the disclosure controls and procedures (as
      defined in Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
      (the
“Exchange Act”) as of November 30, 2006. This evaluation was performed under the
      supervision and with the participation of the Company’s management, including
      the Chief Executive Officer and Chief Financial Officer. Based upon that
      evaluation, the Chief Executive Officer and Chief Financial Officer have
      concluded that these disclosure controls and procedures are effective in
      producing the timely recording, processing, summarizing and reporting of
      information and in accumulating and communicating of information to management
      as appropriate to allow for timely decisions with regard to required
      disclosure.




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




-
          22 -
 *Index*




**PART
      II - OTHER INFORMATION**





**Item
      1. - Legal Proceedings**





The
      Company is subject to various legal proceedings in the ordinary course of
      business.  The Company vigorously defends all matters in which it is
      named as a defendant and, for insurable losses, maintains significant levels
      of
      insurance to protect against adverse judgments, claims or assessments. In
      management’s opinion, although the adequacy of existing insurance coverage or
      the outcome of any legal proceedings may not be predicted with certainty, the
      ultimate liability associated with any claims or litigation in which the Company
      is involved will not have a material effect on the financial condition or
      results of operations.





**Item
      1A. – Risk Factors**





There
      have been no material changes
      from the risk factors disclosed in Part I, Item 1A, of the Company’s Annual
      Report on Form 10-K for the year ended February 28, 2007.





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





None.




**Item5.
      Other Information**





None.





**Item
      6. – Exhibits**




**(a)**           **Exhibits**




31.1
            Certification
                of Chief Executive Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.




31.2
            Certification
                of Chief Financial Officer pursuant to Securities Exchange Act Rules
                13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.




32.1
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.




32.2
            Certification
                of Chief Financial
                Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.




-
          23 -
 *Index*




**(b)**
            **SIGNATURES**








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





ACR
                  GROUP, INC.July
                  16, 2007
              
              /s/
                  Anthony R. MarescaDate
              
              Anthony
                  R. MarescaSenior
                  Vice-President andChief
                  Financial Officer






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