** **

**UNITED STATESSECURITIES 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 June 30, 2006.**                                            |

 

**OR**
| **o** | **Transition  report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**Commission file number 001-11549**

**BLOUNT INTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**                                               |   | **63  0780521**      |
|------------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                           |   | (I.R.S. Employer     |
| Incorporation or  organization)                            |   | Identification  No.) |
|                                                       |   |                 |
| **4909 SE  International Way, Portland, Oregon**           |   | **97222-4679**       |
| (Address of  principal executive offices)                  |   | (Zip Code)           |
|                                                       |   |                 |
| **(503)  653-8881**                                        |
| (Registrant’s  telephone number, including area code) |

 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.
|  | Yes x | No o |   |   |
|--|-------|------|--------|--------|

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
|  | Yes o | No x |   |   |
|--|-------|------|--------|--------|

 

Indicate the number of shares outstanding of each of theissued classes of common stock, as of the latest practicable date.
| Class of Common Stock | ** ** | **Outstanding at August 1, 2006** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|
| $0.01 Par Value                      |       | 47,158,525  shares                                    |       |

 

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**Index**
| Part I   Financial  Information                                                      |   |
|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                |   |
| Item  1. Consolidated Financial Statements                                                          |   |
|                                                                                                |   |
| Unaudited Consolidated  Statements of Income                                                        |   |
| Three and six months ended  June 30, 2006 and 2005                                                  |   |
|                                                                                                |   |
| Unaudited Consolidated  Balance Sheets                                                              |   |
| June 30, 2006 and December  31, 2005                                                                |   |
|                                                                                                |   |
| Unaudited Consolidated  Statements of Cash Flows                                                    |   |
| Six months ended June 30,  2006 and 2005                                                            |   |
|                                                                                                |   |
| Unaudited Consolidated  Statement of Changes in Stockholders’ Equity (Deficit)                 |   |
| Six months ended June 30,  2006                                                                     |   |
|                                                                                                |   |
| Notes to Unaudited Consolidated Financial Statements                                                |   |
|                                                                                                |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                                                                                |   |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                 |   |
|                                                                                                |   |
| Item 4.  Controls and Procedures                                                                    |   |
|                                                                                                |   |
| Part II   Other Information                                                          |   |
|                                                                                                |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                        |   |
|                                                                                                |   |
| Item 6. Exhibits                                                                                    |   |
|                                                                                                |   |
| Signature                                                                                           |   |

 

2

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** **

**PART I       FINANCIAL INFORMATION**

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

**UNAUDITEDCONSOLIDATED STATEMENTS OF INCOME**

**Blount International, Inc. and Subsidiaries**
| ** **                                                                      | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Sales                                                                           |       | $                                               | 165,094    |                                          | $          | 177,618 |   | $ | 328,896 |   | $ | 350,130 |   |
| Cost of sales                                                                   |       | 113,864                                         |       | 120,690                                       |       | 225,072 |   | 235,806 |   |
| Gross profit                                                                    |       | 51,230                                          |       | 56,928                                        |       | 103,824 |   | 114,324 |   |
| Selling, general and  administrative expenses                                   |       | 27,215                                          |       | 27,886                                        |       | 57,525 |   | 55,950 |   |
| Operating income                                                                |       | 24,015                                          |       | 29,042                                        |       | 46,299 |   | 58,374 |   |
| Interest income                                                                 |       | 93                                              |       | 170                                           |       | 164 |   | 411 |   |
| Interest expense                                                                |       | (9,220                                          | )          | (9,505                                        | )          | (18,288 | ) | (18,653 | ) |
| Other income (expense),  net                                                    |       | 946                                             |       | (452                                          | )          | 1,099 |   | (483 | ) |
| Income from  continuing operations before income taxes                          |       | 15,834                                          |       | 19,255                                        |       | 29,274 |   | 39,649 |   |
| Provision for income  taxes                                                     |       | 5,487                                           |       | 3,522                                         |       | 10,541 |   | 6,924 |   |
| Income from  continuing operations                                              |       | 10,347                                          |       | 15,733                                        |       | 18,733 |   | 32,725 |   |
| Discontinued  operations:                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss) from  operations of discontinued lawnmower segment                |       | (1,477                                          | )          | 1,458                                         |       | (561 | ) | 1,699 |   |
| Income tax provision  (benefit)                                                 |       | (557                                            | )          | 19                                            |       | (212 | ) | 22 |   |
| Income (loss)  from discontinued operations                                     |       | (920                                            | )          | 1,439                                         |       | (349 | ) | 1,677 |   |
| Net income                                                                      |       | $                                               | 9,427      |                                          | $          | 17,172 |   | $ | 18,384 |   | $ | 34,402 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Basic income (loss) per  share:                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Continuing  operations                                                          |       | $                                               | 0.22       |                                          | $          | 0.34 |   | $ | 0.40 |   | $ | 0.72 |   |
| Discontinued  operations                                                        |       | (0.02                                           | )          | 0.04                                          |       | (0.01 | ) | 0.04 |   |
| Net income                                                                      |       | $                                               | 0.20       |                                          | $          | 0.38 |   | $ | 0.39 |   | $ | 0.76 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Diluted income (loss)  per share:                                               |       |                                            |       |                                          |       |   |   |   |   |
| Continuing  operations                                                          |       | $                                               | 0.22       |                                          | $          | 0.33 |   | $ | 0.39 |   | $ | 0.69 |   |
| Discontinued  operations                                                        |       | (0.02                                           | )          | 0.03                                          |       | (0.01 | ) | 0.04 |   |
| Net income                                                                      |       | $                                               | 0.20       |                                          | $          | 0.36 |   | $ | 0.38 |   | $ | 0.73 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in per  share calculations:                                         |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                           |       | 47,139                                          |       | 45,692                                        |       | 47,102 |   | 45,397 |   |
| Diluted                                                                         |       | 47,904                                          |       | 47,464                                        |       | 48,031 |   | 47,373 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

3

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**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

**Blount International, Inc. and Subsidiaries **
| ** **                                                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share data)**                                                        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                                                                                                          |       |              |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                               |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                    |       | $                 | 10,609     |                  | $          | 12,937 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,060 and $2,239  respectively                               |       | 95,707            |       | 93,593                |       |
| Inventories                                                                                                                   |       | 87,358            |       | 85,274                |       |
| Deferred income  taxes                                                                                                        |       | 24,122            |       | 28,551                |       |
| Current assets  held for sale                                                                                                 |       | 12,605            |       |                  |       |
| Other current  assets                                                                                                         |       | 5,462             |       | 6,250                 |       |
| Total current  assets                                                                                                         |       | 235,863           |       | 226,605               |       |
| Property, plant and  equipment, net                                                                                           |       | 98,008            |       | 101,538               |       |
| Goodwill                                                                                                                      |       | 71,898            |       | 76,891                |       |
| Deferred financing  costs                                                                                                     |       | 16,534            |       | 17,603                |       |
| Deferred income taxes                                                                                                         |       | 12,148            |       | 12,233                |       |
| Non-current assets held  for sale                                                                                             |       | 9,773             |       |                  |       |
| Other assets                                                                                                                  |       | 20,610            |       | 20,322                |       |
| Total Assets                                                                                                                  |       | $                 | 464,834    |                  | $          | 455,192 |   |
|                                                                                                                          |       |              |       |                  |       |
| **Liabilities and Stockholders’  Deficit**                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                          |       |              |       |                  |       |
| Current  maturities of long-term debt                                                                                         |       | $                 | 1,500      |                  | $          | 2,360 |   |
| Accounts payable                                                                                                              |       | 29,100            |       | 41,224                |       |
| Accrued expenses                                                                                                              |       | 74,213            |       | 69,692                |       |
| Current  liabilities of discontinued operations                                                                               |       | 3,997             |       |                  |       |
| Other current  liabilities                                                                                                    |       | 571               |       | 1,115                 |       |
| Total current  liabilities                                                                                                    |       | 109,381           |       | 114,391               |       |
| Long-term debt,  exclusive of current maturities                                                                              |       | 410,125           |       | 405,363               |       |
| Deferred income taxes                                                                                                         |       | 4,495             |       | 4,250                 |       |
| Employee benefits                                                                                                             |       | 52,341            |       | 65,853                |       |
| Other liabilities                                                                                                             |       | 11,303            |       | 10,522                |       |
| Total liabilities                                                                                                             |       | 587,645           |       | 600,379               |       |
| Commitments and  contingent liabilities                                                                                       |       |              |       |                  |       |
| Stockholders’ equity  (deficit):                                                                                         |       |              |       |                  |       |
| Common stock:  par value $0.01 per share, 100,000,000 shares authorized, 47,149,525 and  47,004,292 outstanding, respectively |       | 471               |       | 470                   |       |
| Capital in  excess of par value of stock                                                                                      |       | 569,940           |       | 566,692               |       |
| Accumulated  deficit                                                                                                          |       | (685,166          | )          | (703,550              | )          |
| Accumulated  other comprehensive loss                                                                                         |       | (8,056            | )          | (8,799                | )          |
| Total stockholders’  (deficit)                                                                                           |       | (122,811          | )          | $                     | (145,187   | ) |
| Total Liabilities and Stockholders’ Deficit                                                                              |       | $                 | 464,834    |                  | $          | 455,192 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

4

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**UNAUDITEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**
| ** **                                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**                                                                       | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                                 |       |                                              |       |   |   |
| **Cash flows from operating  activities:**                                                                 |       |                                              |       |   |   |
| Income from continuing  operations                                                                         |       | $                                                 | 18,733     |   | $ | 32,725 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided by operating  activities: |       |                                              |       |   |   |
| Depreciation of  property, plant and equipment                                                             |       | 8,292                                             |       | 7,370 |   |
| Amortization,  stock compensation and other non-cash charges                                               |       | 3,938                                             |       | 2,247 |   |
| Excess tax  benefit from share-based compensation                                                          |       | (488                                              | )          |   |   |
| Deferred income  tax provision                                                                             |       | 5,599                                             |       | 55 |   |
| Gain on disposal  of property, plant, and equipment                                                        |       | (900                                              | )          | (428 | ) |
| Changes in  assets and liabilities:                                                                        |       |                                              |       |   |   |
| (Increase)  decrease in accounts receivable                                                                |       | (3,977                                            | )          | (5,486 | ) |
| (Increase)  decrease in inventories                                                                        |       | (8,127                                            | )          | (8,300 | ) |
| (Increase)  decrease in other assets                                                                       |       | (176                                              | )          | 116 |   |
| Increase  (decrease) in accounts payable                                                                   |       | (10,163                                           | )          | 118 |   |
| Increase  (decrease) in accrued expenses                                                                   |       | 4,282                                             |       | (2,980 | ) |
| Increase (decrease)  in other liabilities                                                                  |       | (13,007                                           | )          | 2,634 |   |
| Discontinued operations                                                                                    |       | (379                                              | )          | (197 | ) |
| Net cash  provided by operating activities                                                                 |       | 3,627                                             |       | 27,874 |   |
| ** **                                                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Cash flows from investing  activities:**                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Proceeds from sale of  property, plant and equipment                                                       |       | 89                                                |       | 932 |   |
| Acquisition of business                                                                                    |       | (503                                              | )          |   |   |
| Purchases of property,  plant and equipment                                                                |       | (9,714                                            | )          | (9,937 | ) |
| Discontinued operations                                                                                    |       | (109                                              | )          | (597 | ) |
| Net cash used in  investing activities                                                                     |       | (10,237                                           | )          | (9,602 | ) |
| ** **                                                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Cash flows from financing  activities:**                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net borrowings under  revolving credit facility                                                            |       | 87,000                                            |       |   |   |
| Repayment of term loan  principal                                                                          |       | (83,098                                           | )          | (11,988 | ) |
| Issuance costs related  to debt                                                                            |       | (700                                              | )          | (2,554 | ) |
| Issuance costs related  to stock                                                                           |       |                                              | * *   | (1,425 | ) |
| Proceeds from issuance  of stock                                                                           |       |                                              | * *   | 6,123 | * * |
| Purchase of treasury  stock                                                                                |       |                                              | * *   | (6,123 | ) |
| Excess tax benefit from  share-based compensation                                                          |       | 488                                               |       |   |   |
| Proceeds from exercise  of stock options                                                                   |       | 592                                               |       | 3,447 |   |
| Net cash  provided by (used in) financing activities                                                       |       | 4,282                                             |       | (12,520 | ) |
|                                                                                                       |       |                                              |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                                                      |       | (2,328                                            | )          | 5,752 |   |
| Cash and cash  equivalents at beginning of period                                                          |       | 12,937                                            |       | 48,570 |   |
| Cash and cash equivalents at end of period                                                                 |       | $                                                 | 10,609     |   | $ | 54,322 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

5

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**UNAUDITEDCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**BlountInternational, Inc. and Subsidiaries**
| **(Amounts in thousands)**     | ** ** | **Shares  (in 000’s)** | ** ** | **Common Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                                     |       |                             |       |                  |       |                                     |       |                     |       |                                        |       |      |       |
| Balance December 31,  2005               |       | 47,004                           |       | $                     | 470        |                                     | $          | 566,692                  |       | $                                           | (703,550   | )         | $          | (8,799 | ) | $ | (145,187 | ) |
|                                     |       |                             |       |                  |       |                                     |       |                     |       |                                        |       |      |       |
| Net income                               |       |                             |       |                  | * *   | * *                                 | * *   | 18,384                   | * *   | * *                                    | * *   | 18,384    | * *   |
| Other  comprehensive income (loss):      |       |                             |       |                  |       |                                     |       |                     |       |                                        |       |      |       |
| Foreign currency  translation adjustment |       |                             |       |                  | * *   | * *                                 | * *   | * *                 | * *   | 792                                         |       | 792       | * *   |
| Unrealized  losses                       |       |                             |       |                  | * *   | * *                                 | * *   | * *                 | * *   | (49                                         | )          | (49       | )          |
| Comprehensive  income, net               |       |                             | * *   | * *              | * *   | * *                                 | * *   | * *                 | * *   | * *                                    | * *   | 19,127    | * *   |
| Exercise of  stock options               |       | 146                              |       | 1                     |       | 1,079                                    |       |                     | * *   | * *                                    | * *   | 1,080     | * *   |
| Stock  compensation expense              |       |                             |       |                  | * *   | 2,169                                    | * *   | * *                 | * *   | * *                                    | * *   | 2,169     | * *   |
| Balance June 30, 2006                    |       | 47,150                           |       | $                     | 471        |                                     | $          | 569,940                  |       | $                                           | (685,166   | )         | $          | (8,056 | ) | $ | (122,811 | ) |

 

Other comprehensive income for the three and six months endedJune 30, 2006 was $0.5 million and $0.7 million, respectively.  Other comprehensive loss for the three andsix months ended June 30, 2005 was $1.2 million and $2.2 million, respectively.

Theaccompanying notes are an integral part of these consolidated financialstatements.

6

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

**NOTE 1: BASIS OF PRESENTATION**

***Basis of Presentation.***  The unaudited consolidated financialstatements include the accounts of Blount International, Inc. and itssubsidiaries (“Blount” or the “Company”) and are prepared in conformity withaccounting principles generally accepted in the United States of America.  All significant intercompany balances andtransactions have been eliminated.  Inthe opinion of management, the consolidated financial statements contain alladjustments (consisting of only normal recurring adjustments) necessary for afair statement of the financial position, results of operations, cash flows andchanges in stockholders’ equity (deficit) for the periods presented.

The accompanying financial data as of June 30, 2006 and forthe three and six months ended June 30, 2006 and June 30, 2005 has beenprepared by the Company, without audit, pursuant to the rules and regulationsof the United States Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations. The December 31, 2005 Consolidated Balance Sheet was derivedfrom audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States.These Consolidated Financial Statements should be read in conjunction with theConsolidated Financial Statements and the notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005.

***Use of Estimates.******* The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires that management make certain estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities as of the dates of the financial statements,as well as the reported amounts of revenues and expenses during the reportingperiods.  It is reasonably possible thatactual results could differ materially from those estimates and significantchanges to estimates could occur in the near term.

***Reclassifications.***  Certain amounts in the prior period financialstatements have been reclassified to conform to the current periodpresentation.  Such reclassificationshave no effect on previously reported net income or net stockholders’ deficit.

**NOTE 2: ACQUISITIONS AND DISCONTINUED OPERATIONS**

***Discontinued Lawnmower Segment.***  On June 30, 2006, the Company entered into anasset purchase agreement to sell certain of the assets and assign certain ofthe liabilities of Dixon Industries, Inc. (“Dixon”) to Husqvarna ProfessionalOutdoor Products, Inc. (“Husqvarna”), a wholly-owned subsidiary of Husqvarna AB(Sweden).  Dixon had previously beenreported as the Company’s Lawnmower Segment. The sale closed on July 27, 2006 and the Company received preliminarycash proceeds of $33.9 million which were applied to the outstanding principalbalance of the revolving credit facility. The final purchase price is subject to adjustment as specified in theasset purchase agreement.  In conjunctionwith this transaction, the Company recognized pre-tax charges of $1.9 millionfor estimated employee severance costs and $0.3 million for pension curtailmentcosts within discontinued operations for the three months ended June 30,2006.  Certain liabilities of Dixon, aswell as the land, building, building improvements, certain machinery andequipment and various other assets related to its Coffeyville, Kansas facility,were retained by the Company by merger through its indirect wholly-ownedsubsidiary, 4520 Corp. Inc. (“4520 Corp”). This facility is currently being marketed for sale by the Company.

7

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The assets and liabilities associated with the discontinuedoperations of Dixon are as follows:
| ** **                                            | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**                  | ** ** | **2006**          | ** ** |
| Current assets  held for sale:                        |       |              |       |
| Accounts receivable                                   |       | $                 | 1,788      |   |
| Inventory                                             |       | 10,638            |       |
| Prepaid expenses                                      |       | 179               |       |
| Total current  assets held for sale                   |       | $                 | 12,605     |   |
|                                                  |       |              |       |
| Non-current  assets held for sale:                    |       |              |       |
| Property, plant and equipment                         |       | $                 | 4,750      |   |
| Goodwill                                              |       | 5,023             |       |
| Total  non-current assets held for sale               |       | $                 | 9,773      |   |
|                                                  |       |              |       |
| Current  liabilities of discontinued operations:      |       |              |       |
| Accounts payable                                      |       | $                 | 1,834      |   |
| Accrued expenses                                      |       | 2,163             |       |
| Total current  liabilities of discontinued operations |       | $                 | 3,997      |   |

 

Sales associated with the discontinued operations of Dixonwere $12.6 million and $26.5 million for the three and six months ended June30, 2006, respectively, and $16.1 million and $28.9 million for the three andsix months ended June 30, 2005.

***Acquisition of Votec Engineering.***  On June 9, 2006, the Company’s Industrial andPower Equipment segment purchased the assets of Votec Engineering AB (Sweden) (“Votec”)through the Company’s Svenska Blount AB subsidiary for $0.5 million in cashconsideration.  Votec was in the businessof design, manufacturing and distribution of harvester heads for use in timberharvesting equipment.  The purchaseagreement includes additional contingent consideration of up to $0.8 milliondepending on the number of harvesting heads sold over a four year period fromthe date of acquisition.

**NOTE 3: INVENTORIES**

Inventories consisted of the following:
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Raw materials  and supplies          |       | $                 | 26,925     |                  | $          | 29,254 |   |
| Work in progress                     |       | 14,461            |       | 14,276                |       |
| Finished goods                       |       | 45,972            |       | 41,744                |       |
| Total inventories                    |       | $                 | 87,358     |                  | $          | 85,274 |   |

 

As of June 30, 2006, $10.6 million of Dixon inventories wereincluded in current assets held for sale, and were not included in thepreceding table.  As of December 31,2005, $6.3 million of Dixon inventories were included in the preceding table.

8

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**NOTE 4: DEFERRED FINANCING COSTS**

Deferred financing costs represent costs incurred inconjunction with the Company’s debt financing activities and are amortized overthe term of the related debt instruments. Deferred financing costs and the related amortization expense areadjusted when any pre-payments of principal are made to the related outstandingterm loan.   During the six months endedJune 30, 2006, the following occurred (see also Note 5):
| **(Amounts in thousands)** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Balance at  December 31, 2005        |       | $          | 17,603     |   |
| Financing costs  deferred            |       | 700        |       |
| Amortization  during period          |       | (1,769     | )          |
| Balance at June 30,  2006            |       | $          | 16,534     |   |

 

Estimated amortization remaining by year, assuming no furtherpre-payments of term loan principal, is as follows:
| **(Amounts in thousands)** | ** ** | **Estimated  Amortization  by Year** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| 2006                                 |       | $                                         | 1,961      |   |
| 2007                                 |       | 3,922                                     |       |
| 2008                                 |       | 3,922                                     |       |
| 2009                                 |       | 3,250                                     |       |
| 2010 and beyond                      |       | 3,479                                     |       |
| Total amortization                   |       | $                                         | 16,534     |   |

 

**NOTE 5: LONG TERM DEBT**

Long-term debt consisted of the following:
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Revolving credit  facility           |       | $                 | 87,000     |                  |       |   |
| Term loans                           |       | 149,625           |       | $                     | 232,723    |   |
| 8 7/8% senior  subordinated notes    |       | 175,000           |       | 175,000               |       |
| Total debt                           |       | 411,625           |       | 407,723               |       |
| Less current  maturities             |       | (1,500            | )          | (2,360                | )          |
| Long-term debt                       |       | $                 | 410,125    |                  | $          | 405,363 |   |

 

As of June 30, 2006, minimum principal payments required areas follows:
| **(Amounts in thousands)** | ** ** | **Payments** | ** ** |
|--------------------------------------|------------|--------------|------------|
| 2006                                 |       | $            | 750        |   |
| 2007                                 |       | 1,500        |       |
| 2008                                 |       | 1,500        |       |
| 2009                                 |       | 88,500       |       |
| 2010                                 |       | 144,375      |       |
| 2011 and beyond                      |       | 175,000      |       |
| Total debt                           |       | $            | 411,625    |   |

 

The weighted average interest rate on outstanding debt as of June30, 2006was 7.72%.

9

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**2006 Amendment to Credit Facilities.**  On March 23, 2006, the Company amended itssenior credit facilities.  This amendmentincluded the following changes to the term loans and revolving credit facility:

·                  Maximum availability under the revolvingcredit facility was increased from $100.0 million to $150.0 million.

·                  Interest rates were reduced by 0.75% forthe term B loan and 1.00% for the revolving credit facility.

·                  Certain financial covenants were modified,including increases to the amounts that may be paid for acquisitions, dividendsand repurchase of Company stock, as well as modifications to certain financialratio requirements.

·                  The Company incurred fees and third partycosts of $0.7 million related to the amendment.

Immediately following the amendment, the Company completedthe following transactions:

·                  $82.1 million was borrowed under the revolvingcredit facility.

·                  The total principal balance of $4.6 millionwas paid off on the Canadian term loan, and that loan was cancelled.

·                  $77.5 million in principal was paid againstthe term B loan leaving a balance of $150.0 million outstanding.

The revolving creditfacility provides for total available borrowings up to $150.0 million, reducedby outstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of June 30, 2006, the Company had the abilityto borrow an additional $57.1 million under the terms of the revolving creditagreement. The revolving credit facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures on August9, 2009.  Interest is payable monthly inarrears on any prime rate borrowing and at the individual maturity dates forany LIBOR-based borrowing.  Anyoutstanding principal is due in its entirety on the maturity date.

The term B loan facility bears interest at the LIBOR rateplus 1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2010.  The term B loan facilityrequires quarterly payments of $0.4 million, with a final payment of $143.3million due on the maturity date.  Oncerepaid, principal under the term B loan facility may not be re-borrowed by theCompany.

The amended and restatedsenior credit facilities may be prepaid at any time.  There can also be additional mandatoryrepayment requirements related to the sale of Company assets, the issuance ofstock under certain circumstances or upon the Company’s annual generation ofexcess cash flow, as determined under the credit agreement.

Blount International, Inc. and all of its domesticsubsidiaries other than Blount, Inc. guarantee Blount, Inc.’s obligations underthe amended senior credit facilities. The obligations under the senior credit facilities are collateralized bya first priority security interest in substantially all of the assets ofBlount, Inc. and its domestic subsidiaries, as well as a pledge of all ofBlount, Inc.’s capital stock held by Blount International, Inc. and all of thestock of domestic subsidiaries held by Blount, Inc.  Blount, Inc. has also pledged 65% of thestock of its non-domestic subsidiaries as additional collateral.

The amended and restated senior credit facilities containfinancial covenant calculations relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien credit facilities leverage ratio. In addition, there are covenants relating, among other categories, toinvestments, loans and advances, indebtedness, and the sale of stock orassets.  The Company was in compliancewith all debt covenants as of June 30, 2006.

10

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**NOTE 6: INCOME TAXES**

In 2003, the Company recorded a valuation allowance againstits deferred tax assets in the U.S. because management determined at that timethat it was more likely than not that such deferred tax assets would not berealized. The deferred tax assets were comprised principally of domesticfederal net operating loss carryforwards generated during 2001 and 2003, statenet operating loss carryforwards generated from 1998 through 2003, a domesticfederal capital loss carryforward from 2001 and other book expenses notcurrently deductible for tax purposes. Subsequent to 2003, additional deferredtax assets and valuation allowances were recorded in 2004 for domestic netoperating losses and other expenses not currently deductible for tax purposes.

In the fourth quarter of2005, the Company concluded that, except for certain specific deferred taxassets, it was more likely than not that the Company will realize the majorityof these deferred tax assets.  Therefore,the Company reversed most of the valuation allowance as of December 31,2005.  The remaining valuation allowanceof $2.9 million as of December 31, 2005 pertains to certain tax credit andstate net operating loss carryforwards that are not currently expected to berealized before they expire.

The effect of the Company’sdomestic net operating loss carryforwards and the related valuation allowancewas that the income tax provision for the three and six months ended June 30,2005 primarily consisted of foreign, state and local taxes, with minimalfederal tax expense recognized.  Theincome tax provision for the three and six months ended June 30, 2006 consistedof federal, foreign, state and local taxes. The Company continues to utilize its various federal and state netoperating loss and tax credit carryforwards to reduce the amount of cash taxpayments required.

**NOTE 7: PENSION AND POST-RETIREMENT BENEFIT PLANS**

TheCompany sponsors defined benefit pension plans covering substantially all ofits employees in the U.S. and Canada. The Company also sponsors various other post-retirement medical andbenefit plans covering many of its current and former employees.  The components of net periodic benefit costfor these plans are as follows:
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                           | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)** | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                         |       | $                                                   | 1,662      |   | $ | 1,436 |   | $ | 50 |   | $ | 118 |   |
| Interest cost                        |       | 2,597                                               |       | 2,390 |   | 287 |   | 629 |   |
| Expected return  on plan assets      |       | (3,007                                              | )          | (2,388 | ) | (5 | ) | (11 | ) |
| Amortization of  prior service cost  |       | 85                                                  |       | 93 |   | 2 |   | 2 |   |
| Amortization of  net loss            |       | 867                                                 |       | 644 |   | (51 | ) | 393 |   |
| Total net periodic  benefit cost     |       | $                                                   | 2,204      |   | $ | 2,175 |   | $ | 283 |   | $ | 1,131 |   |

 
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                         | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)** | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                         |       | $                                                 | 3,397      |   | $ | 2,919 |   | $ | 172 |   | $ | 225 |   |
| Interest cost                        |       | 5,172                                             |       | 4,784 |   | 856 |   | 1,144 |   |
| Expected return  on plan assets      |       | (5,792                                            | )          | (4,807 | ) | (8 | ) | (22 | ) |
| Amortization of  prior service cost  |       | 178                                               |       | 186 |   | 4 |   | 4 |   |
| Amortization of  net loss            |       | 1,680                                             |       | 1,296 |   | 287 |   | 663 |   |
| Total net periodic  benefit cost     |       | $                                                 | 4,635      |   | $ | 4,378 |   | $ | 1,311 |   | $ | 2,014 |   |

 

The Company expects tocontribute a total of approximately $18 million to $20 million to its fundedpension plans during 2006.

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Asdiscussed in Note 2, the Company recorded a pension curtailment charge of $0.3million in discontinued operations for the three months ended June 30,2006.  This charge is not reflected inthe tables above, and represents the portion of unamortized prior service costrelated to the employees of discontinued operations.

InAugust 2006, the Company announced a restructuring of its domestic retirementplans, including the following changes:

·                  As of December 31, 2006, the Companywill freeze its defined benefit pension plan and the associated nonqualifiedplan.  As of January 1, 2007, employeeswho currently participate in the plan will cease accruing benefits and newemployees will not be eligible to participate. All retirement benefits accrued up to the time of the freeze will bepreserved.

·                  The Company’s defined contribution 401(k) planwill be amended to provide an additional annual Company contribution of 3%, 4%or 5% of base compensation, depending upon the participant’s years ofservice.  The new contribution will bemade whether or not the employee contributes to the plan.  The Company will continue to match employeecontributions to 401(k) accounts up to 4.5%.

Accordingly,the Company expects to record a pension curtailment charge of approximately$3.2 million in the three months ending September 30, 2006, which representsthe unamortized prior service cost for domestic employees, and expects to incurapproximately $0.5 million for related fees and costs associated with thechanges to its retirement plans.

**NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES**

Guarantees and other commercial commitments are summarized inthe following table: 
| ** **                                         | ** ** | **June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2006**          | ** ** |
| Warranty reserve                                   |       | $                 | 3,692      |   |
| Letters of  credit outstanding                     |       | 5,946             |       |
| Third party  financing agreements (1)              |       | 2,921             |       |
| Accounts  receivable securitization (2)            |       | 248               |       |
| Total guarantees and  other commercial commitments |       | $                 | 12,807     |   |

 

(1)  Applicable tothird party financing agreements for customer equipment purchases.

(2)  Includes guarantees to a third partyfinancing company of certain accounts receivable.

Changes in the warranty reserve are as follows:  
| ** **                                           | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)**                 | ** ** | **2006**                                      | ** ** |
| Balance at  December 31, 2005                        |       | $                                             | 4,888      |   |
| Accrued warranty  expense                            |       | 2,045                                         |       |
| Payments made  (in cash or in-kind)                  |       | (2,216                                        | )          |
| Warranty reserve  related to discontinued operations |       | (1,025                                        | )          |
| Balance at June 30,  2006                            |       | $                                             | 3,692      |   |

 

The warranty reserve is included in accrued expenses on theconsolidated balance sheet.  The warrantyreserve related to discontinued operations as of June 30, 2006 is included incurrent liabilities of discontinued operations on the consolidated balancesheet.  In addition to these amounts, theCompany also guarantees certain debt of its subsidiaries (see Note 13).

The Company is a defendant in a number of product liabilitylawsuits and other legal proceedings, some of which seek significant orunspecified damages, involving serious personal injuries for which there areretentions or deductible amounts under the Company’s insurance policies.  The Company also participates from time totime in

12

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product recall programs in which certain identified productsare determined to be potentially dangerous to use and are recalled and replacedor repaired. In addition, the Company is a party to a number of commercial orcontractual suits arising out of the normal course of its business. While therecan be no assurance as to their ultimate outcome, management does not believethese lawsuits, proceedings and programs, alone or in the aggregate, will havea material adverse effect on the Company’s consolidated financial position,operating results or cash flows.

The Company accrues, by a charge to income, an amountrepresenting management’s best estimate of probable loss related to any matterdeemed by management and its counsel as a probable loss contingency in light ofall of the then known circumstances. The Company does not accrue a charge toincome for a matter deemed by management and its counsel to be a reasonablypossible loss contingency in light of all of the current circumstances.

**NOTE 9: EARNINGS PER SHARE DATA**

Thenumber of shares used in the denominators of the basic and diluted earnings pershare computations was as follows: 
| ** **                                                                                       | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Shares in thousands)**                                                              | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Shares for basic  income per share computation – weighted average common shares outstanding |       | 47,139                                          |       | 45,692                                        |       | 47,102 |   | 45,397 |   |
| Dilutive effect  of stock options and warrants                                                   |       | 765                                             |       | 1,772                                         |       | 929 |   | 1,976 |   |
| Shares for  diluted income per share computation                                                 |       | 47,904                                          |       | 47,464                                        |       | 48,031 |   | 47,373 |   |
| Options and stock  appreciation rights excluded from computation as anti-dilutive                |       | 1,945                                           |       | 537                                           |       | 955 |   | 9 |   |

 

**NOTE 10: STOCK-BASED COMPENSATION**

Effective January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), ‘‘Share-Based Payment’’ (“SFASNo. 123(R)”), which is a revision of SFAS No. 123 and supersedes AccountingPrinciples Board Opinion No. 25. SFAS No. 123(R) requires all share-basedcompensation to employees, directors and others who perform services for theCompany, including grants of stock options and stock appreciation rights (“SARs”),to be valued at fair value on the date of grant and to be expensed over theapplicable service period. Under SFAS No. 123(R), pro forma disclosure of theincome statement effects of share-based compensation is no longer analternative to expense recognition.  Theadoption of SFAS No. 123(R) resulted in a reduction in income before taxes of$0.3 million and $2.1 million, and a reduction in income from continuingoperations and net income of $0.2 million and $1.4 million, in the three andsix months ended June 30, 2006, respectively. The adoption of SFAS 123(R) reduced basic and diluted earnings per shareby $0.01 and $0.03 for the three and six months ended June 30, 2006,respectively.  Under the modifiedprospective application method, the results for prior periods have not beenrestated.

Under the Company’s 1999 Stock Incentive Plan and 2000 StockIncentive Plan, options to purchase the Company’s common stock, SARs and otherforms of stock-based compensation could be granted to employees, directors andother persons who perform services for the Company.  Such options may be either incentive stockoptions or non-qualified stock options. Options and SARs generally vest inequal installments over a three year period and expire ten years from the dateof grant.Thenumber of shares that could be issued under these two plans could not exceed anaggregate of 5,875,000 shares.

The fair value of options and SARs was estimated on the grantdate using the Black-Scholes option valuation model. The estimated average lifeof SARs granted in 2006 was derived from the “simplified” method described inSEC Staff Accounting Bulletin No. 107 (“SAB 107”). The expected average lifefor options granted in 2005 was based on historical data and managementestimate.  The risk-free interest rate isbased on the implied yield available on U.S. Treasury zero-coupon issues with theremaining term equal to the average life. The expected volatility factors used

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are based on the historical volatility of the Company’sstock.  The expected dividend yield isbased on historical information and management estimate.

The following assumptions were used to estimate fair value (nogrants of stock based compensation were made during the three months ended June30, 2006):
| ** **                              | ** ** | **Three Months Ended June 30,** | *** *** | **Six Months Ended June 30,** | *** *** |
|-----------------------------------------|------------|-----------------------------------------------------|--------------|---------------------------------------------------|--------------|
| ** **                              | ** ** | **2006**                                            | ** **   | **2005**                                          | ** **   | **2006** | ** ** | **2005** | ** ** |
| Estimated  average life                 |       | n/a                                                 |         | 5 years                                           |         | 6 years |   | 5 years |   |
| Risk-free  interest rate                |       | n/a                                                 |         | 3.9                                               | %            | 4.6 | % | 3.8 | % |
| Expected  volatility                    |       | n/a                                                 |         | 43.0                                              | %            | 26.7 | % | 43.0% - 43. | 9% |
| Weighted average  volatility            |       | n/a                                                 |         | 43.0                                              | %            | 26.7 | % | 43.3 | % |
| Dividend yield                          |       | n/a                                                 |         | 0.0                                               | %            | 0.0 | % | 0.0 | % |
| Weighted average grant  date fair value |       | n/a                                                 |         | $                                                 | 6.70         |   | $ | 6.09 |   | $ | 7.21 |   |
|                                         |            |                                                     |              |                                                   |              |  |  |  |  |  |  |  |

 

A summary of stock option and stock-settled SARs activity forthe six months ended June 30, 2006 is presented in the following table:
| ** **                                     | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Shares**                                                  | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Contractual  Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                     | ** ** | **(in ‘000’s)**                              | ** ** | ** ** | ** ** | ** ** | ** ** | **(in ‘000’s)** | ** ** |
| Outstanding  options at beginning of period    |       | 3,118                                                       |       | $ | 9.22 |   |   |   |   |   |
| SARs Granted                                   |       | 612                                                         |       | 16.76 |   |   |   |   |   |
| Options Exercised                              |       | (146                                                        | )          | 4.08 |   |   |   |   |   |
| Options Forfeited                              |       | (31                                                         | )          | 8.17 |   |   |   |   |   |
| Outstanding  options and SARs at end of period |       | 3,553                                                       |       | 10.73 |   | 6.3 |   | $ | 12,278 |   |
|                                           |       |                                                        |       |   |   |   |   |   |   |
| Outstanding  options at end of period          |       | 2,941                                                       |       | 9.48 |   | 5.6 |   | 12,278 |   |
| Outstanding SARs  at end of period             |       | 612                                                         |       | 16.76 |   | 9.7 |   | zero |   |
|                                           |       |                                                        |       |   |   |   |   |   |   |
| Options exercisable at  end of period          |       | 2,598                                                       |       | $ | 8.54 |   | 5.2 |   | $ | 12,278 |   |

 

The total intrinsic value of options exercised was $0.6million and $4.1 million during the three months ended June 30, 2006 and 2005,respectively.  The total intrinsic valueof options exercised was $1.7 million and $5.9 million during the six monthsended June 30, 2006 and 2005, respectively. The total fair value of options that vested during the three monthsended June 30, 2006 and 2005 was $9 thousand and zero, respectively.  The total fair value of options that vestedduring the six months ended June 30, 2006 and 2005 was $31 thousand and zero,respectively.

The totalshare-based compensation cost recognized in income during the three monthsended June 30, 2006 and 2005 was $0.4 million and $31 thousand,respectively.  The total share-basedcompensation cost recognized in income during the six months ended June 30,2006 and 2005 was $2.2 million and $67 thousand, respectively.  The total tax benefit related to share-basedcompensation recognized in the three months ending June 30, 2006 and 2005 was$0.1 million and $5 thousand, respectively. The total tax benefit related to share-based compensation recognized inthe six months ending June 30, 2006 and 2005 was $0.7 million and $11 thousand,respectively.  As of June 30, 2006, thetotal compensation cost related to awards not yet recognized was $2.6 million.The weighted-average period over which this expense is expected to berecognized is 1.2 years.

The totalamount of cash received from options exercised during the three months endedJune 30, 2006 and 2005 was $0.2 million and $1.7 million, respectively.  The total amount of cash received fromoptions exercised during the six months ended June 30, 2006 and 2005 was $0.6million and $3.4 million, respectively. The tax benefit realized from stock options exercised during the threemonths ended June 30, 2006 and 2005 was $0.2 million and

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zero,respectively.  The tax benefit realizedfrom stock options exercised during the six months ended June 30, 2006 and 2005was $0.5 million and zero, respectively. No cash was used to settle equity instruments in the three or six monthsended June 30, 2006 and 2005.  TheCompany’s policy upon the exercise of options or SARs has been to issue newshares into the market place.

Undercertain conditions, stock options and SARs granted by the Company are eligiblefor continued vesting upon the retirement of the employee. SFAS No. 123(R)clarifies that the fair value of such stock-based compensation should beexpensed based on an accelerated service period, or immediately, rather thanratably over the vesting period stated in the grant, for employees who areretirement eligible prior to the completion of the vesting period. Prior to theadoption of SFAS No. 123(R), the Company’s pro forma disclosure reflected theexpense of such options ratably over the stated vesting period. The SEC has recently clarified that companiesshould continue to follow the expense amortization method that they have beenusing for pro forma disclosure prior to adoption of SFAS No. 123(R), andthen apply the accelerated amortization schedule to all subsequent grants tothose employees that became eligible for retirement within the vesting period.Had the Company been accounting for such stock options using the acceleratedamortization schedule for those employees that were eligible for retirement orbecame eligible for retirement within the vesting period, the effect onstock-based compensation expense in the pro forma disclosure for the three andsix months ended June 30, 2005 would have been de minimus. The effect ofapplying accelerated amortization of expense recognized for those employeesthat were retirement eligible or became retirement eligible within the vestingperiod during the three and six months ended June 30, 2006 was a decrease of$0.2 million and an increase of $1.0 million, respectively.

The following table shows the effect on net earningsand earnings per share had compensation cost been recognized based upon thefair value at the grant dates in accordance with SFAS 123 and SFAS No. 148 “Accountingfor Stock-Based Compensation – Transition and Disclosure – an Amendment of FASBStatement No. 123”. 
| ** **                                                                                                                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands, except per share amounts)**                                                      | ** ** | **2005**                                        | ** ** | **2005**                                      | ** ** |
| Net income as  reported                                                                                                                 |       | $                                               | 17,172     |                                          | $          | 34,402 |   |
| Add: stock-based employee compensation cost, net of  tax, included in the reported results                                              |       | 26                                              |       | 56                                            |       |
| Deduct: total stock-based employee compensation  cost, net of tax, that would have been included in net income under fair  value method |       | (198                                            | )          | (396                                          | )          |
| Pro forma net  income                                                                                                                   |       | $                                               | 17,000     |                                          | $          | 34,062 |   |
|                                                                                                                                    |       |                                            |       |                                          |       |
| Basic earnings  per share as reported                                                                                                   |       | $                                               | 0.38       |                                          | $          | 0.76 |   |
| Pro forma basic  earnings per share                                                                                                     |       | $                                               | 0.37       |                                          | $          | 0.75 |   |
| Diluted earnings  per share as reported                                                                                                 |       | $                                               | 0.36       |                                          | $          | 0.73 |   |
| Pro forma diluted earnings  per share                                                                                                   |       | $                                               | 0.36       |                                          | $          | 0.72 |   |

 

On April 25, 2006, the Company’s stockholders approved theBlount International, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) and the1999 and 2000 plans were replaced at that time. The 2006 Plan provides for substantially similar terms and conditions ofstock-based awards to the predecessor plans, but also provides for the use ofrestricted stock awards and other forms of equity instruments.  The maximum number of shares that may beawarded under the 2006 Plan is 4,236,919, of which 736,919 represent sharesremaining under the 1999 and 2000 plans that were transferred to the 2006Plan.  The maximum number of incentivestock options that may be issued under the 2006 Plan is 1,750,000.  Outstanding stock-based awards issued underthe 1999 and 2000 plans remain unaffected by the adoption of the 2006 Plan.

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**NOTE 11: SEGMENT INFORMATION**

The Company identifies operating segments primarily based onmanagement responsibility. The Company has two reportable segments: OutdoorProducts, and Industrial and Power Equipment. See also Note 2 regarding the discontinuation of the former Lawnmowersegment business. Outdoor Products manufactures and markets cutting chain,bars, sprockets and accessories for chainsaw use, concrete cutting equipment,lawnmower blades and accessories for outdoor yard care equipment. Industrialand Power Equipment manufactures and markets timber harvesting equipment,timber harvesting heads, industrial tractors and loaders, rotation bearings andswing drives.

Certain financial information by segment is presented in thetable below:
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Sales:**                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outdoor Products                     |       | $                                               | 114,723    |                                          | $          | 114,092 |   | $ | 228,919 |   | $ | 230,893 |   |
| Industrial and  Power Equipment      |       | 50,637                                          |       | 63,687                                        |       | 100,479 |   | 119,703 |   |
| Inter-segment elimination            |       | (266                                            | )          | (161                                          | )          | (502 | ) | (466 | ) |
| Total sales                          |       | $                                               | 165,094    |                                          | $          | 177,618 |   | $ | 328,896 |   | $ | 350,130 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| **Operating income:**                | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outdoor Products                     |       | $                                               | 23,098     |                                          | $          | 26,797 |   | $ | 47,905 |   | $ | 55,283 |   |
| Industrial and  Power Equipment      |       | 4,708                                           |       | 6,439                                         |       | 8,031 |   | 11,186 |   |
| Inter-segment elimination            |       | 16                                              |       | 9                                             |       | (27 | ) | (30 | ) |
| Contribution from  segments          |       | 27,822                                          |       | 33,245                                        |       | 55,909 |   | 66,439 |   |
| Corporate expenses                   |       | (3,807                                          | )          | (4,203                                        | )          | (9,610 | ) | (8,065 | ) |
| Operating income                     |       | $                                               | 24,015     |                                          | $          | 29,042 |   | $ | 46,299 |   | $ | 58,374 |   |

 

**NOTE 12: SUPPLEMENTAL CASH FLOWS INFORMATION**
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Interest paid                        |       | $                                                 | 17,071     |   | $ | 12,713 |   |
| Income taxes paid, net               |       | $                                                 | 5,698      |   | $ | 7,056 |   |

 

**NOTE 13: CONSOLIDATING FINANCIAL INFORMATION**

SeeNote 5 for a discussion of the Company’s guarantor subsidiaries.  The following consolidating financialinformation sets forth condensed consolidating statements of operations,balance sheets and statements of cash flows of Blount International, Inc., Blount,Inc., the guarantor subsidiaries and the non-guarantor subsidiaries.

16

----

**CondensedConsolidating Statement of Operations Information**
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** **   | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **   | **Eliminations** | ** **   | **Consolidated** | ** **   |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|--------------|-----------------------------|------------|-----------------------------------|--------------|------------------|--------------|------------------|--------------|
| **For the  Three Months Ended June 30, 2006**                 | ** ** | ** **                       | ** ** | ** **        | ** **   | ** **                  | ** ** | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
| Sales                                                         |       |                             |       | $                 | 115,262      |                        | $          | 26,898                            |         | $                | 70,461       |             | $            | (47,527 | ) | $ | 165,094 | *** *** |
| Cost of sales                                                 |       |                             |       | 85,222            |         | 21,644                      |       | 54,419                            |         | (47,421          | )            | 113,864          | *** *** |
| Gross profit                                                  |       |                             |       | 30,040            |         | 5,254                       |       | 16,042                            |         | (106             | )            | 51,230           | *** *** |
| Selling, general  and administrative expenses                 |       |                             |       | 18,483            |         | 1,287                       |       | 7,445                             |         |             | *** *** | 27,215           | *** *** |
| Operating income                                              |       |                             |       | 11,557            |         | 3,967                       |       | 8,597                             |         | (106             | )            | 24,015           | *** *** |
| Other, net                                                    |       | $                                | (5,674     | )                 | (2,195       | )                           | (170       | )                                 | (142         | )                |         | *** ***     | (8,181       | ) |
| Income (loss)  from continuing operations before income taxes |       | (5,674                           | )          | 9,362             |         | 3,797                       |       | 8,455                             |         | (106             | )            | 15,834           |         |
| Provision  (benefit) for income taxes                         |       | (1,957                           | )          | 4,271             |         | 489                         |       | 2,684                             |         |             | *** *** | 5,487            | *** *** |
| Income (loss)  from continuing operations                     |       | (3,717                           | )          | 5,091             |         | 3,308                       |       | 5,771                             |         | (106             | )            | 10,347           |         |
| Income (loss)  from discontinued operations                   |       |                             |       |              | *** *** | (920                        | )          | *** ***                      | *** *** | *** ***     | *** *** | (920             | )            |
| Equity in  earnings of affiliated companies                   |       | 13,144                           |       | 8,053             |         | 142                         |       |                              |         | (21,339          | )            |             |         |
| Net income                                                    |       | $                                | 9,427      |              | $            | 13,144                      |       | $                                 | 2,530        |             | $            | 5,771            |         | $ | (21,445 | ) | $ | 9,427 |   |

 
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** **   | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **   | **Eliminations** | ** **   | **Consolidated** | ** **   |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|--------------|-----------------------------|------------|-----------------------------------|--------------|------------------|--------------|------------------|--------------|
| ** For the Six Months Ended June 30, 2006**              | ** ** | ** **                       | ** ** | ** **        | ** **   | ** **                  | ** ** | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
| Sales                                                         |       |                             |       | $                 | 234,886      |                        | $          | 55,547                            |         | $                | 139,612      |             | $            | (101,149 | ) | $ | 328,896 | *** *** |
| Cost of sales                                                 |       |                             |       | 176,111           |         | 43,643                      |       | 107,831                           |         | (102,513         | )            | 225,072          | *** *** |
| Gross profit                                                  |       |                             |       | 58,775            |         | 11,904                      |       | 31,781                            |         | 1,364            |         | 103,824          | *** *** |
| Selling, general  and administrative expenses                 |       |                             |       | 38,807            |         | 4,041                       |       | 14,677                            |         |             | *** *** | 57,525           | *** *** |
| Operating income                                              |       |                             |       | 19,968            |         | 7,863                       |       | 17,104                            |         | 1,364            |         | 46,299           | *** *** |
| Other, net                                                    |       | $                                | (11,027    | )                 | (5,120       | )                           | (331       | )                                 | (547         | )                |         | *** ***     | (17,025      | ) |
| Income (loss)  from continuing operations before income taxes |       | (11,027                          | )          | 14,848            |         | 7,532                       |       | 16,557                            |         | 1,364            |         | 29,274           |         |
| Provision  (benefit) for income taxes                         |       | (3,970                           | )          | 9,113             |         | 377                         |       | 5,021                             |         |             | *** *** | 10,541           | *** *** |
| Income (loss)  from continuing operations                     |       | (7,057                           | )          | 5,735             |         | 7,155                       |       | 11,536                            |         | 1,364            |         | 18,733           |         |
| Income (loss)  from discontinued operations                   |       |                             |       |              | *** *** | (349                        | )          | *** ***                      | *** *** | *** ***     | *** *** | (349             | )            |
| Equity in  earnings of affiliated companies                   |       | 25,441                           |       | 19,706            |         | 206                         |       |                              |         | (45,353          | )            |             |         |
| Net income                                                    |       | $                                | 18,384     |              | $            | 25,441                      |       | $                                 | 7,012        |             | $            | 11,536           |         | $ | (43,989 | ) | $ | 18,384 |   |

 

17

----

 
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** **   | **Guarantor  Subsidiaries** | ** **   | **Non-  Guarantor  Subsidiaries** | ** **   | **Eliminations** | ** **   | **Consolidated** | ** **   |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|--------------|-----------------------------|--------------|-----------------------------------|--------------|------------------|--------------|------------------|--------------|
| **For the  Three Months Ended June 30, 2005**                 | ** ** | ** **                       | ** ** | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
| Sales                                                         |       |                             |       | $                 | 127,448      |                        | $            | 29,239                            |         | $                | 68,023       |             | $            | (47,092 | ) | $ | 177,618 |   |
| Cost of sales                                                 |       |                             |       | 87,747            |         | 23,978                      |         | 51,723                            |         | (42,758          | )            | 120,690          |         |
| Gross profit                                                  |       |                             |       | 39,701            |         | 5,261                       |         | 16,300                            |         | (4,334           | )            | 56,928           |         |
| Selling, general  and administrative expenses                 |       |                             |       | 18,496            |         | 1,624                       |         | 7,766                             |         |             | *** *** | 27,886           | *** *** |
| Operating income                                              |       |                             |       | 21,205            |         | 3,637                       |         | 8,534                             |         | (4,334           | )            | 29,042           |         |
| Other, net                                                    |       | $                                | (4,434     | )                 | (5,245       | )                           | 131          |                              | (239         | )                |         | *** ***     | (9,787       | ) |
| Income (loss)  from continuing operations before income taxes |       | (4,434                           | )          | 15,960            |         | 3,768                       |         | 8,295                             |         | (4,334           | )            | 19,255           |         |
| Provision  (benefit) for income taxes                         |       | (757                             | )          | 1,378             |         | 242                         |         | 2,659                             |         |             | *** *** | 3,522            | *** *** |
| Income (loss)  from continuing operations                     |       | (3,677                           | )          | 14,582            |         | 3,526                       |         | 5,636                             |         | (4,334           | )            | 15,733           |         |
| Income (loss)  from discontinued operations                   |       |                             |       |              | *** *** | 1,439                       | *** *** | *** ***                      | *** *** | *** ***     | *** *** | 1,439            | *** *** |
| Equity in  earnings of affiliated companies, net              |       | 20,849                           |       | 6,267             |         | 65                          |         |                              |         | (27,181          | )            |             |         |
| Net income                                                    |       | $                                | 17,172     |              | $            | 20,849                      |         | $                                 | 5,030        |             | $            | 5,636            |         | $ | (31,515 | ) | $ | 17,172 |   |
|                                                          |       |                             |       |              |         |                        |         |                              |         |             |         |             |         |
| **For the  Six Months Ended June 30, 2005**                   | ** ** | ** **                       | ** ** | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
| Sales                                                         |       |                             |       | $                 | 249,379      |                        | $            | 58,497                            |         | $                | 139,711      |             | $            | (97,457 | ) | $ | 350,130 |   |
| Cost of sales                                                 |       |                             |       | 180,186           |         | 48,062                      |         | 103,066                           |         | (95,508          | )            | 235,806          |         |
| Gross profit                                                  |       |                             |       | 69,193            |         | 10,435                      |         | 36,645                            |         | (1,949           | )            | 114,324          |         |
| Selling, general  and administrative expenses                 |       |                             |       | 36,625            |         | 3,316                       |         | 16,009                            |         |             |         | 55,950           |         |
| Operating income                                              |       |                             |       | 32,568            |         | 7,119                       |         | 20,636                            |         | (1,949           | )            | 58,374           |         |
| Other, net                                                    |       | $                                | (8,466     | )                 | (10,022      | )                           |         |                              | (237         | )                | *** *** | *** ***     | (18,725      | ) |
| Income (loss)  from continuing operations before income taxes |       | (8,466                           | )          | 22,546            |         | 7,119                       |         | 20,399                            |         | (1,949           | )            | 39,649           |         |
| Provision  (benefit) for income taxes                         |       | (1,422                           | )          | 652               |         | 419                         |         | 7,275                             |         |             |         | 6,924            |         |
| Income (loss)  from continuing operations                     |       | (7,044                           | )          | 21,894            |         | 6,700                       |         | 13,124                            |         | (1,949           | )            | 32,725           |         |
| Income (loss)  from discontinued operations                   |       |                             |       |              |         | 1,677                       |         |                              |         |             |         | 1,677            |         |
| Equity in  earnings of affiliated companies, net              |       | 41,446                           |       | 19,552            |         | 134                         |         |                              |         | (61,132          | )            |             |         |
| Net income (loss)                                             |       | $                                | 34,402     |              | $            | 41,446                      |         | $                                 | 8,511        |             | $            | 13,124           |         | $ | (63,081 | ) | $ | 34,402 |   |

 

18

----

**Condensed Consolidating Balance Sheet Information**
| **(Amounts in thousands)**                       | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** **   | **Guarantor  Subsidiaries** | ** **   | **Non-  Guarantor  Subsidiaries** | ** **   | **Eliminations** | ** **   | **Consolidated** | ** **   |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|--------------|-----------------------------|--------------|-----------------------------------|--------------|------------------|--------------|------------------|--------------|
| **June  30, 2006**                                         | ** ** | ** **                       | ** ** | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
| **Assets**                                                 | ** ** | ** **                       | ** ** | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
|                                                       |       |                             |       |              |         |                        |         |                              |         |             |         |             |         |
| Cash and cash equivalents                                  |       |                             |       |              |         |                        | *** *** | $                                 | 14,073       |             | $            | (3,464           | )            | $ | 10,609 | *** *** |
| Accounts receivable, net                                   |       |                             |       | $                 | 54,080       |                        | $            | 13,280                            |         | 28,347           |         |             | *** *** | 95,707 | *** *** |
| Intercompany receivables                                   |       |                             |       | 160,279           |         | 74,642                      |         | 12,646                            |         | (247,567         | )            |             |         |
| Inventories                                                |       |                             |       | 38,259            |         | 20,044                      |         | 29,055                            |         |             | *** *** | 87,358           | *** *** |
| Current assets held for sale                               |       |                             |       |              |         | 12,605                      | *** *** | *** ***                      | *** *** | *** ***     | *** *** | 12,605           | *** *** |
| Other current assets                                       |       |                             |       | 26,376            |         | 454                         |         | 2,754                             |         |             | *** *** | 29,584           | *** *** |
| Total current assets                                       |       |                             |       | 278,994           |         | 121,025                     |         | 86,875                            |         | (251,031         | )            | 235,863          | *** *** |
| Investments in  affiliated companies                       |       | $                                | 126,124    |              | 283,995      |                        | 529          |                              | 248          |             | (410,896     | )                |         |   |
| Property, plant  and equipment, net                        |       |                             |       | 36,193            |         | 17,791                      |         | 44,024                            |         |             | *** *** | 98,008           | *** *** |
| Non-current  assets held for sale                          |       |                             |       |              |         | 9,773                       | *** *** | *** ***                      | *** *** | *** ***     | *** *** | 9,773            | *** *** |
| Goodwill and  other assets                                 |       |                             |       | 69,820            |         | 35,198                      |         | 16,172                            |         |             | *** *** | 121,190          | *** *** |
| Total Assets                                               |       | $                                | 126,124    |              | $            | 669,002                     |         | $                                 | 184,316      |             | $            | 147,319          |         | $ | (661,927 | ) | $ | 464,834 |   |
|                                                       |       |                             |       |              |         |                        |         |                              |         |             |         |             |         |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |                             |       |              |         |                        |         |                              |         |             |         |             |         |
|                                                       |       |                             |       |              |         |                        |         |                              |         |             |         |             |         |
| Current maturities of long-term debt                       |       |                             |       | $                 | 1,500        | *** ***                | *** *** | *** ***                      | *** *** | *** ***     | *** *** | *** ***     | $            | 1,500 | *** *** |
| Accounts payable                                           |       |                             |       | 18,407            |         | $                           | 6,144        |                              | $            | 8,013            |         | $                | (3,464       | ) | 29,100 |   |
| Intercompany payables                                      |       | $                                | 247,567    |              |         |                        |         |                              |         |             | (247,567     | )                |         |   |
| Current liabilities of discontinued operations             |       |                             |       |              | *** *** | 3,997                       | *** *** | *** ***                      | *** *** | *** ***     | *** *** | 3,997            | *** *** |
| Other current liabilities                                  |       |                             |       | 51,663            |         | 7,935                       |         | 15,186                            |         |             | *** *** | 74,784           | *** *** |
| Total current liabilities                                  |       | 247,567                          |       | 71,570            |         | 18,076                      |         | 23,199                            |         | (251,031         | )            | 109,381          |         |
| Long-term debt,  excluding current maturities              |       |                             |       | 410,125           | *** *** | *** ***                | *** *** | *** ***                      | *** *** | *** ***     | *** *** | 410,125          | *** *** |
| Other  liabilities                                         |       | 1,368                            |       | 61,183            |         | 132                         |         | 5,456                             |         |             | *** *** | 68,139           | *** *** |
| Total  liabilities                                         |       | 248,935                          |       | 542,878           |         | 18,208                      |         | 28,655                            |         | (251,031         | )            | 587,645          |         |
| Stockholders’  equity (deficit)                       |       | (122,811                         | )          | 126,124           |         | 166,108                     |         | 118,664                           |         | (410,896         | )            | (122,811         | )            |
| Total Liabilities and  Stockholders’ Equity (Deficit) |       | $                                | 126,124    |              | $            | 669,002                     |         | $                                 | 184,316      |             | $            | 147,319          |         | $ | (661,927 | ) | $ | 464,834 |   |

 

19

----

 
| **(Amounts in thousands)**                       | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** **   | **Consolidated** | ** **   |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|--------------|------------------|--------------|
| **December  31, 2005**                                     | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** **   | ** **       | ** **   |
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** **   | ** **       | ** **   |
| **Assets**                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** **   | ** **       | ** **   |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |         |             |         |
| Cash and cash  equivalents                                 |       |                             |       | $                 | 43         |                        |       |                              | $          | 13,731           |         | $                | (837         | ) | $ | 12,937 |   |
| Accounts  receivable, net                                  |       |                             |       | 54,278            |       | $                           | 18,831     |                              | 20,484     | *** ***     | *** *** | *** ***     | 93,593       | *** *** |
| Intercompany  receivables                                  |       |                             |       | 159,351           |       | 67,624                      |       | 16,774                            |       | (243,749         | )            | *** ***     | *** *** |
| Inventories                                                |       |                             |       | 38,688            |       | 23,784                      |       | 22,802                            |       |             |         | 85,274           |         |
| Other current  assets                                      |       |                             |       | 31,404            |       | 867                         |       | 2,530                             |       |             |         | 34,801           |         |
| Total current assets                                       |       |                             |       | 283,764           |       | 111,106                     |       | 76,321                            |       | (244,586         | )            | 226,605          |         |
| Investments in  affiliated companies                       |       | $                                | 99,943     |              | 261,663    |                        | 323        |                              | 248        |             | (362,177     | )                | *** *** | *** *** |
| Property, plant  and equipment, net                        |       |                             |       | 26,558            |       | 32,591                      |       | 42,389                            |       |             |         | 101,538          |         |
| Goodwill and  other assets                                 |       |                             |       | 79,924            |       | 30,708                      |       | 16,417                            |       |             |         | 127,049          |         |
| Total Assets                                               |       | $                                | 99,943     |              | $          | 651,909                     |       | $                                 | 174,728    |             | $            | 135,375          |         | $ | (606,763 | ) | $ | 455,192 |   |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |         |             |         |
| **Liabilities  and Stockholders’ Equity (Deficit)**   | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** **   | ** **       | ** **   |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |         |             |         |
| Current  maturities of long-term debt                      |       |                             |       | $                 | 2,313      |                        |       | *** ***                      | $          | 47               | *** *** | *** ***     | *** *** | $ | 2,360 | *** *** |
| Accounts payable                                           |       |                             |       | 24,940            |       | $                           | 9,375      |                              | 7,746      |             | $            | (837             | )            | 41,224 |   |
| Intercompany  payables                                     |       | $                                | 243,749    |              |       |                        |       |                              |       |             | (243,749     | )                |         |   |
| Other current  liabilities                                 |       |                             |       | 49,862            |       | 7,179                       |       | 13,766                            |       |             |         | 70,807           |         |
| Total current liabilities                                  |       | 243,749                          |       | 77,115            |       | 16,554                      |       | 21,559                            |       | (244,586         | )            | 114,391          |         |
| Long-term debt,  excluding current maturities              |       |                             |       | 400,757           |       |                        |       | 4,606                             |       |             |         | 405,363          |         |
| Other  liabilities                                         |       | 1,381                            |       | 74,094            |       |                        |       | 5,150                             |       |             |         | 80,625           |         |
| Total  liabilities                                         |       | 245,130                          |       | 551,966           |       | 16,554                      |       | 31,315                            |       | (244,586         | )            | 600,379          |         |
| Stockholders’  equity (deficit)                       |       | (145,187                         | )          | 99,943            |       | 158,174                     |       | 104,060                           |       | (362,177         | )            | (145,187         | )            |
| Total Liabilities and Stockholders’  Equity (Deficit) |       | $                                | 99,943     |              | $          | 651,909                     |       | $                                 | 174,728    |             | $            | 135,375          |         | $ | (606,763 | ) | $ | 455,192 |   |

 

20

----

**Condensed Consolidating Cash Flows Information**
| **(Amounts in thousands)**                  | ** **   | **Blount  International,  Inc.** | ** **   | **Blount,  Inc.** | ** **   | **Guarantor  Subsidiaries** | ** **   | **Non-  Guarantor  Subsidiaries** | ** **   | **Eliminations** | ** **   | **Consolidated** | ** **   |
|-------------------------------------------------------|--------------|----------------------------------|--------------|-------------------|--------------|-----------------------------|--------------|-----------------------------------|--------------|------------------|--------------|------------------|--------------|
| **For the  Six Months Ended June 30, 2006**           | ** **   | ** **                       | ** **   | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
|                                                  |         |                             |         |              |         |                        |         |                              |         |             |         |             |         |
| Net cash  provided by (used in) operating activities  |         | $                                | 3,957        |              | $            | (8,493                      | )            | $                                 | 1,605        |             | $            | 9,185            |         | $ | (2,627 | ) | $ | 3,627 |   |
| ** **                                            | ** **   | ** **                       | ** **   | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
| Net cash used in  investing activities                | *** *** | *** ***                     |         | (4,194            | )            | (1,605                      | )            | (4,438                            | )            | *** ***     |         | (10,237          | )            |
|                                                  |         |                             |         |              |         |                        |         |                              |         |             |         |             |         |
| Net cash  provided by (used in) financing activities  |         | (3,957                           | )            | 12,644            |         |                        | *** *** | (4,405                            | )            |             | *** *** | 4,282            | *** *** |
|                                                  |         |                             |         |              |         |                        |         |                              |         |             |         |             |         |
| Net decrease in  cash and cash equivalents            | *** *** | *** ***                     |         | (43               | )            |                        |         | 342                               |         | (2,627           | )            | (2,328           | )            |
| Cash and cash  equivalents at beginning of period     | *** *** | *** ***                     |         | 43                |         |                        |         | 13,731                            |         | (837             | )            | 12,937           | *** *** |
| Cash and cash  equivalents at end of period           |         | $                                | 0            |              | $            | 0                           |         | $                                 | 0            |             | $            | 14,073           |         | $ | (3,464 | ) | $ | 10,609 |   |
| *** ***                                          | *** *** | *** ***                     | *** *** | *** ***      | *** *** | *** ***                | *** *** | *** ***                      | *** *** | *** ***     | *** *** | *** ***     | *** *** |
| **For the  Six Months Ended June 30, 2005**           | ** **   | ** **                       | ** **   | ** **        | ** **   | ** **                  | ** **   | ** **                        | ** **   | ** **       | ** **   | ** **       | ** **   |
|                                                  |         |                             |         |              |         |                        |         |                              |         |             |         |             |         |
| Net cash  provided by (used in) operating activities  |         | $                                | (5,723       | )                 | $            | 32,475                      |         | $                                 | 4,012        |             | $            | (2,890           | )            | *** *** |   | $ | 27,874 |   |
|                                                  |         |                             |         |              |         |                        |         |                              |         |             |         |             |         |
| Net cash used in  investing activities                |         |                             |         | (1,687            | )            | (1,552                      | )            | (6,363                            | )            |             | *** *** | (9,602           | )            |
|                                                  |         |                             |         |              |         |                        |         |                              |         |             |         |             |         |
| Net cash  provided by (used in) financing activities  |         | 5,723                            |         | (18,066           | )            | *** ***                |         | (177                              | )            | *** ***     |         | (12,520          | )            |
|                                                  |         |                             |         |              |         |                        |         |                              |         |             |         |             |         |
| Net increase  (decrease) in cash and cash equivalents | *** *** | *** ***                     |         | 12,722            |         | 2,460                       |         | (9,430                            | )            | *** ***     |         | 5,752            |         |
| Cash and cash  equivalents at beginning of period     | *** *** | *** ***                     |         | 17,229            |         | (2,460                      | )            | 33,801                            | *** *** | *** ***     |         | 48,570           |         |
| Cash and cash  equivalents at end of period           |         | $                                | 0            |              | $            | 29,951                      |         | $                                 | 0            |             | $            | 24,371           | *** *** | *** *** |   | $ | 54,322 |   |

 

**NOTE 14: RECENT ACCOUNTING PRONOUNCEMENTS**

In June 2006, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”This interpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes.”  FASB Interpretation No. 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  It also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.  TheCompany is currently evaluating the impact of FASB Interpretation No. 48 on itsfinancial statements.  Application ofthis interpretation is required in financial statements for fiscal years beginningafter December 15, 2006.

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**ITEM 2.**  **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussion and analysis should be read inconjunction with our unaudited consolidated financial statements includedelsewhere in this report.

**Operating Results**

**Three months and six months ended June 30, 2006(unaudited) compared to three months and six months ended June 30, 2005(unaudited).**
| ** **                                                                      | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Sales                                                                           |       | $                                               | 165,094    |                                          | $          | 177,618 |   | $ | 328,896 |   | $ | 350,130 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Operating income                                                                |       | 24,015                                          |       | 29,042                                        |       | 46,299 |   | 58,374 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Income from  continuing operations                                              |       | 10,347                                          |       | 15,733                                        |       | 18,733 |   | 32,725 |   |
| Income from  continuing operations per diluted share                            |       | 0.22                                            |       | 0.33                                          |       | 0.39 |   | 0.69 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                                                      |       | 9,427                                           |       | 17,172                                        |       | 18,384 |   | 34,402 |   |
| Net income per diluted  share                                                   |       | 0.20                                            |       | 0.36                                          |       | 0.38 |   | 0.73 |   |
|                                                                                 |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

On June 30, 2006, we announced a definitive asset purchaseagreement had been entered into to sell certain of the assets and assigncertain of the liabilities of our Dixon Industries, Inc. (“Dixon”) subsidiaryto Husqvarna Professional Outdoor Products, Inc. (“Husqvarna”), a wholly-ownedsubsidiary of Husqvarna AB (Sweden). This transaction was closed on July 27, 2006.  Dixon comprised our entire Lawnmowersegment.  As a result of this agreement,the Lawnmower segment is reported as discontinued operations for all periodspresented, and is not included in our results from continuing operations.  Furthermore, certain assets and liabilitiesassociated with this business have been reported separately in our presentationof financial position as of June 30, 2006.

Sales in the three and six months ended June 30, 2006 decreasedby $12.5 million, or 7%, and $21.2 million, or 6%, respectively, from the sameperiods in 2005.  These decreases arelargely due to decreases in sales volume, amounting to $12.8 million and $21.2million, respectively, and also declines of $0.2 million and $2.4 million,respectively, related to changes in currency exchange rates.  These factors were partially offset byincreases of $0.5 million, and $2.4 million, respectively, related to thecombination of increased selling prices and product mix.  Highlights for the year over year comparisonincluded the following:

·                  In the Outdoor Products segment, sales wereroughly comparable to last year’s results with an increase of $0.6 million, or1%, for the quarter, and a decrease of $2.0 million, or 1%, for the six monthperiod.  Foreign currency translation hada negative effect on sales of $0.2 million during the second quarter and $2.4million for the six months ended June 30 compared to last year.

·                  In the Industrial and Power Equipmentsegment, sales decreased by $13.1 million, or 20%, during the second quarter,and $19.2 million, or 16%, for the six month period.  These decreases were primarily the result ofa unit volume decline for timber harvesting equipment.  Weaker market conditions and an ongoing brandconversion contributed to the decline in volume.

·                  International sales, on a consolidatedbasis, decreased by 6% during the quarter and 7% for the six months ended June30, 2006, and domestic sales decreased by 8% for the quarter and 5% for the sixmonth period compared to the same periods of 2005.

Consolidated order backlog at June 30, 2006 was $112.6million, an increase from $108.3 million at March 31, 2006, but a decrease from$127.5 million at December 31, 2005.

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Operating income decreased by $5.0 million to $24.0 millionduring the second quarter and by $12.1 million to $46.3 million during the sixmonths ended June 30, 2006 compared to the same periods in 2005.  For the second quarter, the operating marginwas 14.5% compared to 16.4% one year ago, and for the six months ended June 30,2006, the operating margin was 14.1% compared to 16.7% for the same period lastyear.  The decrease includes a year overyear reduction in gross profit of $5.7 million, or 10%, for the second quarter,and a reduction of $10.5 million, or 9%, for the six month period.  Selling, General and Administrative(SG&A) expense decreased by $0.7 million, or 2%, during the second quarter,but for the six month period, increased by $1.6 million, or 3%, compared to oneyear ago.  Included in these results arethe following key factors:

·                  The unfavorable effect of lower salesrevenue primarily from a reduction in sales of timber harvesting equipment;

·                  The unfavorable net effect of currencyexchange rates, due to a weak US dollar relative to the Canadian dollar and theBrazilian real, and a relatively stronger US dollar relative to Europeancurrencies;

·                  Additional SG&A costs due to theadoption of a new accounting standard for stock-based compensation; and

·                  The net favorable effect of lower steelcosts.

The year over year change in consolidated gross profit ispresented in the following table:

| (Amounts in millions) | ** ** | **Three months  Ended June 30** | ** ** | **Six months  Ended June 30** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| 2005 gross  profit              |       | $                                              | 56.9       |                                         | $          | 114.3 |   |
| Increase (decrease)             |       |                                           |       |                                         |       |
| Sales volume                    |       | (2.4                                           | )          | (5.6                                         | )          |
| Selling price and mix           |       | 0.5                                            |       | 2.4                                          |       |
| Product cost and mix            |       | (1.4                                           | )          | (2.1                                         | )          |
| Foreign currency translation    |       | (2.4                                           | )          | (5.2                                         | )          |
| 2006 gross profit               |       | $                                              | 51.2       |                                         | $          | 103.8 |   |

 

As a percent of sales, gross margin decreased to 31.0% and31.6%, respectively, for the three and six months ended June 30, 2006 comparedto 32.1% and 32.7% for the same periods in 2005.  The decrease attributed to sales volume wasprimarily due to a decrease in unit sales of timber harvesting equipment fromour Industrial and Power Equipment segment. The increase in selling price and mix is primarily due to higher sellingprices in the Industrial and Power Equipment segment.  The decrease in gross margin related toproduct mix and cost included a reduction in efficiency within both segmentsdue to reductions in production volumes. These inefficiencies are partially offset by lower steel costs of $0.5million and $1.2 million, respectively, as compared to last year’s three andsix month results.   Currency exchangerates contributed to lower revenues in Europe with the average six month U.S.dollar exchange rate 6% stronger than the Euro (with similar ratios for otherkey European currencies); however this unfavorable trend moderated somewhatduring the second quarter.  Exchangerates also contributed to higher product costs for our plants in Canada andBrazil, where the average exchange rates for the six months were approximately8% and 16% weaker, respectively, for the U.S. dollar compared to these respectivelocal currencies.

SG&Adecreased to $27.2 million in the second quarter of 2006 from $27.9 million inthe same period of 2005, but for the six months ended June 30, 2006 increasedto $57.5 million compared to $56.0 million one year ago.  As a percent of sales, SG&A increased to16.5% and 17.5%, respectively, for the three and six month periods compared to15.7% and 16.0%, respectively, for these same periods in 2005.  The second quarter’s year over year decreaseof $0.7 million, or 2%, included lower expenses in the following areas: $0.9million for performance-based compensation, $0.4 million for bad debt and $0.2million for legal and compliance-related professional services.  These decreases were offset partially byincreases of $0.4 million for stock-based compensation expense related to theadoption of a new accounting standard, $0.5 million for engineering materialsand professional services related to new product upgrades and $0.4 million dueto our annual increase of base compensation estimated at an average of3.5%.  For the six months ended June 30,2006, expenses were $1.6 million higher than last year, including $0.7 millionrelated to the annual increase in base compensation, $2.1 million forstock-based compensation expense and $0.9 million for engineering materials andprofessional services related to new product upgrades.  These increases

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werepartially offset by decreases that included a $1.0 million reduction inperformance-based compensation, a $0.5 million reduction for bad debt expenseand $0.3 for the favorable effect of currency exchange rates on expenses at ourforeign offices.

Interestexpense was $9.2 million and $18.3 million, respectively, during the quarterand six months ended June 30, 2006.   Thedecreases from the prior year’s comparable periods of $0.3 million for thequarter and $0.4 million for the six month period are largely due to the loweraverage outstanding debt balances, partially offset by an increase in averageinterest rates on our variable rate debt. Interest income decreased by $0.1 million and $0.2 million,respectively, for the quarter and six month periods compared to last year,primarily due to a decline in average cash balances.

Otherincome was $0.9 million and $1.1 million, respectively, for the second quarterand six months ended June 30, 2006 compared to other expense of $0.5 millionand $0.5 million, respectively, for the same periods in 2005.  Included in the current year results was anet gain on insurance recovery related to property damaged in a fire at ourplant in Curitiba, Brazil.  Last year’sresults included a $0.4 million charge recorded in the second quarter to writeoff deferred financing costs resulting from the early payment of debtprincipal.

InAugust 2006, we announced a restructuring of our domestic retirement plans,including the following changes:

·                  As of December 31, 2006, we willfreeze our defined benefit pension plan and the associated nonqualifiedplan.  As of January 1, 2007, employeeswho currently participate in the plan will cease accruing benefits and newemployees will not be eligible to participate. All retirement benefits accrued up to the time of the freeze will be preserved.

·                  Our defined contribution 401(k) plan will beamended to provide an additional annual Company contribution of 3%, 4% or 5% ofbase compensation, depending upon the participant’s years of service.  The new contribution will be made whether ornot the employee contributes to the plan. Blount will continue to match employee contributions to 401(k) accountsup to 4.5%.

Accordingly,we expect to record a pension curtailment charge of approximately $3.2 millionin the three months ending September 30, 2006, representing the unamortizedprior service cost for domestic employees, and an additional charge ofapproximately $0.5 million for related fees and costs associated with thechanges to our retirement plans.

Ourprovision for income taxes was $5.5 million in the second quarter of 2006, withan effective tax rate of 34.7% on income before income taxes, and $10.5 millionfor the six months ended June 30, 2006, with an effective tax rate of36.0%.  The income tax provision was $3.5million in the second quarter of 2005, which was 18.3% of income before incometaxes, and $6.9 million for the six months ended June 30, 2005, with aneffective tax rate of 17.5%.  Last year’ssignificantly lower tax rate was primarily due to our application of a fullvaluation allowance on domestic tax assets and was based upon a managementdetermination concerning the likelihood of those assets being realized.  This determination was first made in thethird quarter of 2003 and was modified at December 31, 2005, when most of theremaining valuation allowance was reversed. Therefore, the 2005 income tax provision included very little domesticfederal tax expense, whereas the 2006 income tax provision includes a fulldomestic federal tax expense component. The effect of this increase in our effective income tax rate ispartially offset by a decrease in income before taxes during the reportedperiods of 2006 compared to the same periods last year.  We continue to benefit with reduced cash taxpayments from the utilization of our various tax loss and credit carryforwards.

The decrease in netincome from continuing operations is primarily due to the decrease in operatingincome and an increase in our provision for income taxes, partially offset byfavorable trends in net interest expense and other income and expense.

As mentioned above, forall periods presented, discontinued operations consisted entirely of ourLawnmower segment.  The loss fromdiscontinued operations was $0.9 million ($0.02 per diluted share) for thesecond quarter and $0.3 million ($0.01 per diluted share) for the six monthsended June 30, 2006 compared to net income from discontinued operations of $1.4million ($0.03 per diluted share) and $1.7 million ($0.04 per diluted share)for the same periods in 2005.

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Saleswithin the discontinued Lawnmower segment for the three months ended June 30,2006 were $12.6 million compared to $16.1 million in 2005.  For the six month period ended June 30, 2006,sales were $26.5 million compared to $28.9 million in 2005.  The decline in sales revenue was due to adecrease in unit volume, offset partially by an increase due to favorable priceand product mix.  The year over yeardecline in income for the periods reported is primarily the result of therecognition of $1.9 million for estimated employee severance and $0.3 millionfor pension curtailment costs associated with employees of the Lawnmowersegment.  Lower unit sales volume andsales revenue also contributed to the reduced operating income in the 2006comparable periods.  The tax benefit ondiscontinued operations was $0.6 million and $0.2 million, respectively, forthe three and six months ended June 30, 2006, compared to a negligible taxprovision for the two comparable periods in 2005.

We estimate the pre-taxgain on the assets of the Lawnmower segment that were sold in the third quarterof 2006 to be between $19.0 million and $21.0 million, exclusive of transactioncosts, transition costs and any disposal activities.  We anticipate incurring additional costsassociated with these activities during the transition and wind-down periodnecessary to transfer the purchased assets to Husqvarna’s Beatrice, Nebraskafacility and to dispose of the Lawnmower segment’s Coffeyville, Kansas land andbuilding.  We currently estimate that thetotal pre-tax costs associated with the Dixon sale will be approximately $3.5million to $4.5 million, consisting of $1.9 million for estimated employeeseverance, $0.3 for pension curtailment, $0.5 million for legal and other fees,and from $0.8 million to $1.8 million for transition and wind-down costs.

***Segment Results.*******The following table reflectssegment sales and operating income for 2006 and 2005:
|                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** **   |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|--------------|
| **(Amounts in thousands)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** **   | **2006** | ** ** | **2005** | ** ** |
| **Sales:**                           |       |                                            |       |                                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| Outdoor Products                     |       | $                                               | 114,723    |                                          | $            | 114,092 |   | $ | 228,919 |   | $ | 230,893 |   |
| Industrial and Power  Equipment      |       | 50,637                                          |       | 63,687                                        |         | 100,479 |   | 119,703 |   |
| Inter-Segment  Elimination           |       | (266                                            | )          | (161                                          | )            | (502 | ) | (466 | ) |
| Total Sales                          |       | $                                               | 165,094    |                                          | $            | 177,618 |   | $ | 328,896 |   | $ | 350,130 | *** *** |
|                                 |       |                                            |       |                                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| **Operating income:**                |       |                                            |       |                                          | *** *** | *** *** | *** *** | *** *** | *** *** |
| Outdoor Products                     |       | $                                               | 23,098     |                                          | $            | 26,797 |   | $ | 47,905 |   | $ | 55,283 |   |
| Industrial and Power  Equipment      |       | 4,708                                           |       | 6,439                                         |         | 8,031 |   | 11,186 |   |
| Inter-Segment  Elimination           |       | 16                                              |       | 9                                             |         | (27 | ) | (30 | ) |
| Contribution from  segments          |       | 27,822                                          |       | 33,245                                        |         | 55,909 |   | 66,439 | *** *** |
| Corporate expenses                   |       | (3,807                                          | )          | (4,203                                        | )            | (9,610 | ) | (8,065 | ) |
| Operating income                     |       | $                                               | 24,015     |                                          | $            | 29,042 |   | $ | 46,299 |   | $ | 58,374 | *** *** |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment in the second quarterof 2006 increased $0.6 million, or 1%, compared to the same period of2005.  For the six month period, salesdecreased $2.0 million, or 1%, year over year.

Domestic sales growth was 7% during the quarter and six monthperiod, offset by declines in sales outside the United States of 3% during thequarter and 5% for the six month period. The unfavorable year over year effect from foreign currency translationon sales, which was due primarily to exchange rates involving the Euro andother European currencies, was less pronounced during the quarter, at $0.2million, but continued the unfavorable trend reported in the first quarter andcontributed to the $2.4 million impact for the six month period.  The effect of volume on the second quarter’sresults was an increase in sales of $1.4 million, partially offset by a $0.5million decrease in average selling prices due to product and customermix.  For the six month period, thefavorable effect of higher average selling prices of $0.8 million was partiallyoffset by a decrease in volume resulting in lower sales of $0.4 million.  Sales of outdoor yard care parts andaccessories increased 5% for both the second quarter and six monthperiods.  Sales of concrete cuttingproducts decreased 3% during the second quarter, but were 2% higher for the sixmonths.  Sales of chain saw parts andaccessories were equal to last year’s second quarter results but lower thanlast year’s six month results by 3%. Order backlog increased during the quarter to $75.7 million compared to$70.3 million at March 31, 2006 and $82.5 million at December 31, 2005.  The decrease in backlog compared to last

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year is partially due to increases in capacity and improved delivery tocustomers that have resulted in reduced order lead-time.

 

Second quarter segment contribution to operating incomedecreased $3.7 million and was 20.1% of sales compared to 23.5% of sales lastyear.  Segment contribution to operatingincome for the six months ended June 30, 2006 declined $7.4 million over lastyear and was 20.9% of sales compared to 23.9% of sales last year.  In the quarter and six month comparisons tolast year’s results, foreign currency exchange rates have had an unfavorablenet effect of $2.4 million and $4.9 million, respectively, or two-thirds of thetotal decrease in operating income.  Theeffect of foreign currency exchange rates is due to the U.S. dollar beingweaker than in 2005 against currencies in countries where we have amanufacturing presence and the U.S. dollar being stronger than in 2005 in marketswhere we have significant sales.  Salesvolume increases generated $0.3 million more operating income for the quarter,but the effect of volume was $0.9 million unfavorable for the six months.  The combined net unfavorable effect of price,product costs, mix and SG&A expense was $1.6 million for the quarter and$1.5 million for the six months compared to the same periods last year.  Included in these results were decreases insteel prices estimated at $0.7 million and $1.6 million, respectively, for thethree and six month period, and a $0.5 million decrease in bad debt expense forboth the three and six month period. These decreases, however, along with selling price increases implementedin certain of our markets, are offset by the unfavorable shift in mix amongproducts and distribution channels, and other increases in our costs ofproduction due to decreased efficiency related to lower volumes of manufacturedproducts.

***Industrial and Power Equipment Segment.***** **Sales for the Industrial and Power Equipment segmentdecreased $13.1 million, or 20%, in the second quarter of 2006 compared to thesame period of 2005.  For the six monthperiod, sales decreased $19.2 million, or 16%, compared to the same period of2005.

The year over year decline was caused by lower unit sales ofour timber harvesting equipment, estimated to be $15.9 million and $24.5million, respectively, for the second quarter and six month period.  The volume decrease occurred across many ofour product lines and brands in North America reflecting softer marketconditions compared to one year ago.

Demand for our harvesters and forwarders was weakest inCanada and the upper Midwestern part of the United States due toweather-related factors, and Canadian sales have also been negatively impactedby unfavorable movement in exchange rates as the Canadian dollar hasstrengthened in relation to the United States dollar.  Retail sales incentive programs have beenimplemented on a targeted basis to improve sell-through of product and recovermarket share lost in the first six months of 2006.  In February 2006 our agreements withCaterpillar, Inc. were amended and products offered under the Timberking brandwere converted to the “Caterpillar®” or “CAT®” brand.  This brand conversion is an important part ofa long term strategy to increase our product offerings and the distributionnetwork where our products are sold.  Thebrand transition temporarily slowed the reorder of new product by Caterpillardealers during 2006 until much of the Timberking branded inventory held atdealers is sold through to the dealers’ customers.  We expect that the dealer inventory aspect ofthe branding transition will be completed prior to the end of 2006.

During June, 2006, the Industrial and Power Equipment segmentacquired the assets of Votec Engineering AB (“Votec”) through the Company’sSvenska Blount AB subsidiary.  Votec wasa small European manufacturer of harvester heads for timber harvestingequipment.  The acquisition of Votecrepresents an additional part of the segment’s strategy to increase its productofferings and to strengthen its international market penetration.

The decrease in volume for our timber harvesting equipmentwas partially offset by an increase in volume for our rotational bearings andswing drive products, with total sales in these component lines up 43% for thequarter and 38% for the six months compared to last year.  Incremental volume from these componentproducts, sold primarily in domestic markets, generated $1.9 million and $3.9million of additional sales, respectively, for the quarter and six monthperiods.  The growth was primarily due toincreased unit volumes, which have been supported by improvements inmanufacturing processes that generated better product flow and customerservice.

Improved price realization and mix generated additionalsegment sales of $1.0 million and $1.6 million, respectively, for the three andsix month periods.  Geographically,segment sales declined both domestically and

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outside the United States, with sales outside the UnitedStates decreasing by $2.5 million, or 26%, and $4.1 million, or 23%,respectively, from last year’s results with a decline in units sold in Canadapartially offset by continued growth in other foreign markets.  Order backlog for the segment was $37.0million at June 30, 2006 compared to $38.0 million at March 31, 2006 and $45.0million at December 31, 2005.

Segment contribution to operating income decreased $1.7million, or 27%, during the second quarter of 2006 and $3.2 million, or 28%, duringthe six months ended June 30, 2006 compared to the same periods in 2005.  The year over year decrease includes theunfavorable effect from lower volume of $2.8 million for the second quarter and$4.7 million for the first six months.  Anet increase in steel prices resulted in higher costs of $0.2 million and $0.4million for the second quarter and six months, respectively.  Product development costs, related toEPA-mandated Tier III engines and other product design projects, increased $0.5million for the quarter and $0.9 million for the six months ended June 30, 2006compared to one year ago.  The brandconversion of Caterpillar products resulted in incremental expense of $0.8million for the six months ended June 30, 2006 compared to last year.  These decreases in segment contribution werepartially offset by the year over year favorable effects of higher sellingprice realization, product mix and lower product costs with a combined effectestimated at $1.8 million for the second quarter and $3.6 million for the sixmonths compared to last year.  Theoperating margin was 9.3% and 8.0%, respectively, for the second quarter andfirst six months of 2006 compared to 10.1% and 9.3%, respectively, for the sameperiods in 2005.

***Corporate Expense.***  The decrease of $0.4 million, or 9%, duringthe second quarter of 2006 included decreases of $0.4 million in legal andother professional services and $0.2 million for performance-basedcompensation.  These areas of lower expensewere partially offset by increases of $0.4 million for stock-based compensationrelated to the adoption of a new accounting standard, Statement of FinancialAccounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) atthe beginning of 2006.  For the six monthperiod, corporate expense increased $1.5 million, or 19%, compared to the sameperiod last year and included stock-based compensation related to SFAS No.123(R) of $2.1 million.  SFAS No. 123(R)requires the recognition of expense for stock related grants made to retirement-eligibleemployees be recorded at the time of grant. In the first quarter, the Company granted stock-based compensation tocertain retirement-eligible employees and, as a result, the stock-basedcompensation expense recorded during the first quarter was higher than theexpense during the second quarter and, similarly, higher than the expenseexpected in the remainder of the year. The total expected stock-based compensation expense for 2006 isestimated to be between $2.8 million and $3.3 million.  In the first six months, legal and otherprofessional service expenses were $0.7 million lower than 2005 and employeebenefits expenses were $0.3 million lower than last year.

**Financial Condition, Liquidity and CapitalResources**

Totaldebt at June 30, 2006 was $411.6 million compared to $407.7 million at December31, 2005.  As of June 30, 2006,outstanding debt consisted of a revolving credit facility balance of $87.0million, a term B loan of $149.6 million and 8 7/8% senior subordinated notesof $175.0 million.  The interest rate isfixed on the senior subordinated notes but is variable on the revolving creditfacility and term B loan.  The increasein total debt was used to make voluntary contributions to our domestic fundedpension plan and to support increases in working capital.

On July27, 2006, we closed the sale of certain assets of Dixon, the subsidiary thatmade up our Lawnmower segment, to a subsidiary of Husqvarna.  Blount received preliminary proceeds of $33.9million upon the closing of the transaction. These proceeds, which are subjectto certain post-closing adjustments, will be used to reduce debt, fund theclosure of Dixon’s Coffeyville, Kansas facility and pay applicable taxes,transition costs and transaction fees. Blount estimates that net after tax cashproceeds available for debt repayment from the transaction will be between $25million and $28 million.

Interestexpense was $18.3 million in the first six months of 2006, a decrease of $0.4million compared to the first six months of 2005.  The comparison included the favorable effectfrom a reduction in the average principal amount of debt outstanding, but waslargely offset by higher variable interest rates for the two comparableperiods.  Our interest expense may varyin the future because the revolving credit facility and term B loan interestrates are variable.  Interest rates haverisen throughout 2005 and the first six months of 2006, although we reduced ourvariable interest rates with an amendment of our credit facilities in March 2006.  Our weighted average interest rate

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on alldebt was 7.72% as of June 30, 2006, compared to 7.63% as of December 31,2005.  Cash paid for interest in thefirst six months of 2006 was $17.1 million compared to $12.7 million in thesame period of 2005, an increase due to the difference in timing of term loaninterest payments.

***2006 Amendment to Credit Facilities.***  On March 23, 2006, we amended our seniorcredit facilities.  This amendmentincluded the following changes to the term notes and revolving credit facility:

·                  Maximum availability under the revolvingcredit facility was increased from $100.0 million to $150.0 million.

·                  Interest rates were reduced by 0.75% forthe term B loan and 1.00% for the revolving credit facility.

·                  Certain financial covenants were modified,including increases to the amounts that may be expended for acquisitions,dividends and purchase of Company stock, as well as modifications to certainfinancial ratio requirements.

·                  The Company incurred fees and third partycosts of $0.7 million related to the amendment.

Immediately following theamendment, we completed the following transactions:

·                  $82.1 million was borrowed under therevolving credit facility.

·                  The total principal balance of $4.6 millionwas paid off on the Canadian term loan, and that loan was cancelled.

·                  $77.5 million in principal was paid againstthe term B loan, leaving a balance of $150.0 million outstanding.

The revolving creditfacility provides total available borrowings up to $150.0 million, reduced byoutstanding letters of credit, and further restricted by a specific leverageratio and first lien credit facilities leverage ratio.  As ofJune 30, 2006, we had the ability to borrow an additional $57.1 million underthe terms of the revolving credit agreement. The revolving credit facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2009.  Interest is payablemonthly in arrears on any prime rate borrowings and at the individual maturitydates for any LIBOR-based term borrowings. Any outstanding principal is due in its entirety on the maturity date.

The term B loan facility bears interest at the LIBOR rateplus 1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2010.  The term B loan facilityrequires quarterly payments of $0.4 million, with a final payment of $143.3million due on the maturity date.  Oncerepaid, principal under the term B loan facility may not be re-borrowed by theCompany.

The senior credit facilities may be prepaid at any time.  There can also be additional mandatoryrepayment requirements related to the sale of our assets or the issuance ofstock under certain circumstances, and upon the Company’s annual generation ofexcess cash flow as determined under the credit agreement.  These credit facilities contain financialcovenant calculations relating to maximum capital expenditures, minimum fixedcharge coverage ratio, maximum leverage ratio and maximum first lien creditfacilities leverage ratio.  In addition,there are covenants relating, among other categories, to investments, loans andadvances, indebtedness, and the sale of stock or assets.  The Company was in compliance with all debtcovenants as of June 30, 2006.  Specificfinancial covenant calculations under the agreements are as follows:
|                                              | ** ** | **Required Ratio** | ** ** | **June 30, 2006** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Fixed charge  coverage ratio                 |       | Not less than 1.15      |       | 1.87                        |       |
| Leverage ratio                               |       | Not more than 4.25      |       | 3.18                        |       |
| First lien credit  facilities leverage ratio |       | Not more than 2.75      |       | 1.85                        |       |

Our debt continues to besignificant, and future debt service payments continue to represent substantialobligations.  This degree of leverage mayadversely affect our operations and could have important consequences.

We intendto fund working capital, capital expenditures and debt service requirements forthe next twelve months through expected cash flows generated fromoperations.  We expect our remainingresources will be sufficient to

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coverany additional increases in working capital and capital expenditures for atleast the next twelve months.  There canbe no assurance, however, that these resources will be sufficient to meet ourneeds.  We may also consider otheroptions available to us in connection with future liquidity needs.

Cashand cash equivalents at June 30, 2006 were $10.6 million compared to $12.9million at December 31, 2005.  The $2.3million decrease in our cash balance during the first six months of 2006compares to an increase of $5.8 million in the same period of 2005.

Cashused in operating activities is summarized in the following table:
|                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**    | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Income from continuing  operations      |       | $                                                 | 18,733     |   | $ | 32,725 | *** *** |
| Non-cash items                          |       | 16,441                                            |       | 9,244 | *** *** |
| Subtotal                                |       | 35,174                                            |       | 41,969 |   |
| Changes in assets and  liabilities, net |       | (31,168                                           | )          | (13,898 | ) |
| Discontinued operations                 |       | (379                                              | )          | (197 | ) |
| Cash provided by operating activities   |       | $                                                 | 3,627      |   | $ | 27,874 | *** *** |

 

Non-cashitems consist of expenses for depreciation of property, plant and equipment;amortization; stock compensation expense; the tax benefit from exercise ofstock options and other non-cash charges; deferred income taxes and the (gain)loss on disposal of property, plant and equipment.

Cashprovided by operating activities during the six months ended June 30, 2006 of$3.6 million included the following:

·                  Net income from continuing operations of$18.7 million decreased $14.0 million due to the lower operating income thatresulted from a decrease in sales, unfavorable currency exchange rates,additional stock compensation expense from our adoption of SFAS 123(R), and anincrease in our effective income tax rate.

·                  Non-cash adjustments included stockcompensation expense of $2.1 million related to the adoption of SFAS 123(R);$5.6 million of deferred tax expense related to our utilization of netoperating losses to satisfy what would otherwise have become cash taxliabilities on domestic earnings; depreciation and amortization of $10.1million, an increase of $0.9 million compared to the same period in 2005primarily due to an increase in depreciation expense; offset partially by $1.4million of gains related to the disposal of property, plant and equipment andexcess tax benefits from share-based compensation.

·                  Changes in assets and liabilities, net,used $31.2 million of net cash and included the following items.

·                  A $4.0 million increase in receivables.

·                  An $8.1 million increase in inventories.

·                  A combined decrease in accounts payable andaccrued expenses of $5.9 million, reflecting a decrease in the purchase of rawmaterials and other inventory, offset partially by an increase in the currentportion of our obligations for pension contributions.

·                  A decrease in other liabilities of $13.0million, primarily due to contributions made towards our funded pension plans.

·                  Discontinued operations used $0.4 millionin cash.

Cashprovided from operating activities during the six months ended June 30, 2005 of$27.9 million included the following:

·                  Net income from continuing operations of$32.7 million.

·                  Non-cash adjustments of $9.2 million fordepreciation, amortization and other non-cash charges, offset partially by again on disposal of property, plant and equipment.

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·                  Changes in assets and liabilities, net, used$13.9 million of net cash and included the following items.

·                  A $5.5 million increase in accountsreceivable due to the increase in sales, as well as sales programs in certainof our segments, which also contributed to the increase in accounts receivablebalances.

·                  An $8.3 million increase in inventoriesacross our two segments, primarily due to business growth.

·                  A decrease in accrued expenses of $3.0million, including a reduction in accruals for performance-based compensationrelated to 2004 that was paid during the first quarter of 2005, offset by otherincreases, related to business growth, and a decrease in the current portion ofpost-retirement benefits.

·                  An increase in other liabilities of $2.6million included an increase in the non-current post-retirement benefitobligation.

·                  Discontinued operations used $0.2 millionin cash.

Accountsreceivable increased during the first six months of 2006 by $4.0 millioncompared to the amount reported at the end of 2005, after adjusting for $1.9million from the effect of our discontinued Lawnmower segment and othernon-cash items.  The increase inreceivables is due to the increase in trade receivables, primarily due to thetiming of sales and collections in June 2006 compared to December 2005.  The allowance for doubtful accounts was $2.1million at June 30, 2006 and $2.2 million at December 31, 2005.

Cashtaxes paid during the first six months of 2006 were $5.7 million compared to$7.1 million for the same period in 2005. The year over year decrease in cash taxes was primarily due to a declinein foreign pre-tax income, and also reflects a higher than normal amount paidduring the first half of 2005 related to the previous year.  Otherwise, cash taxes on continuing operationsare expected to be comparable to the 2005 level even though the effective taxrate has increased, since we continue to utilize net operating loss and taxcredit carryforwards to reduce current taxes payable.  Cash taxes paid may increase following thegain on sale of the assets of our discontinued operations.

Netcash used for investing activities in the first six months of 2006 was $10.2million compared to $9.6 million for the same period in 2005.  Included in the 2006 activity was $9.7million of expenditures for property, plant and equipment, which includes $2.4million to expand capacity in our manufacturing facility in China, $1.4 millionto expand key product line capacity at our manufacturing facility in Canada,and $0.9 million for business systems, related support equipment and othermanufacturing equipment.  During thesecond quarter, we also had expenditures of $0.5 to acquire the assets ofVotec.  The 2005 investments included$9.9 million of expenditures for property, plant and equipment.  This included capital spending for additionalcapacity, with $2.6 million at our China facility and $2.4 million in ourBrazilian facility, as well as other capital expenditures primarily for ourother manufacturing facilities.  In 2005we also received $0.9 million from the sale of a surplus manufacturing facilityand warehouse at our Zebulon, North Carolina location.  During 2006, we expect to utilizeapproximately $23.0 million to $25.0 million in available cash for capitalexpenditures, much of it directed toward increasing our manufacturing capacityand efficiency in the Outdoor Products segment.

Wereceived gross proceeds of $33.9 million on July 27, 2006 from the sale of ourdiscontinued Lawnmower segment.  Theseproceeds are subject to certain post-closing adjustments, and will be utilizedto reduce debt, fund the closure of Dixon’s Coffeyville, Kansas facility andpay applicable taxes and transaction fees. We estimate that net cash proceedsavailable for debt repayment from the transaction will be between $25 millionand $28 million.

Cashprovided by financing activities in the first six months of 2006 was $4.3million compared to cash used of $12.5 million in the comparable period of2005.  The 2006 activity included thefollowing transactions:

·                  A net draw down of $87.0 million on ourrevolving credit facility to support operations and fund the reduction of termloan debt as part of the amendment to our senior credit facilities thatoccurred in March 2006.

·                  Payments of $83.1 million of principal onour term loan debt, which included $1.0 million of scheduled payments and $82.1million related to the March 2006 amendment of our senior credit facilities.

·                  Expenditures of $0.7 million incurred withthe March 2006 amendment to our senior credit facilities.

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·                  Exercise of stock options that generated$1.1 million, including $0.6 million of proceeds from the exercise of stockoptions, and a related $0.5 million of tax benefit from these exercises that isrecognized as a financing activity under SFAS No. 123(R).

The2005 activity included the following:

·                  Debt reduction of $12.0 million, including$10.0 million of voluntary pre-payments of principal and $2.0 million ofscheduled and required payments on our term loans;

·                  Payment of previously recorded debtissuance costs of $2.6 million, and previously recorded stock issuance costs of$1.4 million related to financing transactions completed in 2004;

·                  Proceeds from the issuance of stock andrelated purchase of treasury stock, each at $6.1 million; and

·                  Proceeds from the exercise of stock optionsof $3.4 million.

In June 2005, we and certain of our stockholders sold 7.5million shares of our common stock in a public offering.  We retained cumulative net proceeds of $10thousand for the following transactions:

·                  Lehman Brothers sold 7,117,620 shares ofour common stock, and its ownership as of June 30, 2005 was approximately 8.9million shares, or 19% of our outstanding common stock.  We did not receive any proceeds from thissecondary sale;

·                  We issued 382,380 shares of common stockand received net proceeds of $6.1 million;

·                  We purchased 382,380 shares of common stockfrom certain stockholders for $6.1 million. These shares are held as treasury stock and we have accounted for thistreasury stock as constructively retired in the consolidated financialstatements; and

·                  Warrants for 1,000,000 shares of commonstock at $0.01 per share were exercised with net proceeds of $10 thousandreceived by Blount.

Of the amounts disbursed for debt and equity issuance costsin the first six months of 2005, $3.2 million was paid to Lehman Brothers,which previously controlled more than 50% of our outstanding common stock.

**Critical Accounting Policies**

On January 1, 2006 we adopted a new accounting standard, SFASNo. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”.  SFAS No. 123(R) requires all share-basedpayments to employees, directors and others who provide services to theCompany, including grants of employee stock options and stock appreciationrights (“SARs”), to be valued at fair value on the date of grant, and to beexpensed over the applicable service period. Prior to the adoption of this new standard, our policy was to accountfor stock-based compensation under Accounting Principles Board Opinion No. 25,using the intrinsic value method for stock options, and to provide pro formadisclosure of the income statement effects of share-based payments using fairvalue accounting.

In implementing this new standard, the modified prospectivemethod was selected, and, as a result, the comparison to financial results inperiods ending prior to our date of adoption will not include the effects ofexpense recognition for similar transactions. During the three months and six months ended June 30, 2006, stockcompensation expense was $0.2 million and $1.4 million, respectively, net ofthe tax effect.  This compares to proforma expense of $0.2 million and $0.4 million, respectively, net of tax forthe same periods in 2005.  At June 30,2006, there was $2.6 million of total compensation cost for awards that has notyet been recognized, with the weighted average period over which it is expectedto be recognized at 1.2 years.

Undercertain conditions, stock options and SARs granted by the Company are eligiblefor continued vesting upon the retirement of the employee. SFAS No. 123(R)clarifies that the fair value of such stock-based compensation should beexpensed based on an accelerated service period, or immediately, rather thanratably over the vesting period stated in the grant, for employees who areretirement-eligible prior to the completion of the vesting period. The amount of accelerated amortization ofexpense recognized for those employees that were retirement eligible or becameretirement eligible within the vesting period during the three months and sixmonths ended June 30, 2006 was a decrease of $0.2 million and an increase of$1.0 million, respectively.

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Withthe adoption SFAS No. 123(R), there was no material difference in valuationmethodologies or assumptions used to estimate fair value compared to ourprevious pro forma disclosure. Furthermore, there have been no modifications to outstanding optionsduring the period this standard was adopted or any changes in the terms orconditions of outstanding stock awards. New awards were granted during the first quarter of 2006, in the form ofstock-settled SARs, with comparable quantities granted as in previous grants.

**RecentAccounting Pronouncements**

In June 2006, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”This interpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes.”  FASB Interpretation No. 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  It also provides guidanceon de-recognition, classification, interest and penalties, accounting ininterim periods, disclosure and transition. We are currently evaluating the impact of FASB Interpretation No. 48 onour financial statements.  Application ofthis interpretation is required in financial statements for fiscal yearsbeginning after December 15, 2006.

**Forward Looking Statements**

“Forward looking statements,” as defined by the PrivateSecurities Litigation Reform Act of 1995, used in this report, includingwithout limitation our “outlook,” “guidance,” “expectations,”  “beliefs,” “plans,” “indications,” “estimates,”“anticipations,” and their variants, are based upon available information andupon assumptions that the Company believes are reasonable; however, theseforward looking statements involve certain risks and should not be consideredindicative of actual results that the Company may achieve in the future.Specifically, issues concerning foreign currency exchange rates, the cost tothe Company of commodities in general, and of steel in particular, theanticipated level of applicable interest rates and the anticipated effects ofdiscontinued operations involve certain estimates and assumptions. To theextent that these, or any other such assumptions, are not realized goingforward, or other unforeseen factors arise, actual results for the periodssubsequent to the date of this report may differ materially.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed to market risk from changes in interest rates,foreign currency exchange rates and commodity prices, including raw materialssuch as steel. We manage our exposure to these market risks through our regularoperating and financing activities, and, when deemed appropriate, through theuse of derivatives. When utilized, derivatives are used as risk managementtools and not for trading or speculative purposes. See also the Market Risksection of Management’s Discussion and Analysis of Financial Condition andResults of Operations in our most recent Form 10-K for further discussion ofmarket risk.

**ITEM 4. CONTROLS AND PROCEDURES**

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s Security Exchange Act of 1934 reportsis recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and regulations,and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

The Company, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the design and

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operation of the Company’sdisclosure controls and procedures. Based on this evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel as of June 30, 2006.

There have been nochanges in the Company’s internal control over financial reporting during theCompany’s most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**PART II     OTHERINFORMATION**

**ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

The following actions were taken at our annual meeting ofstockholders, which was held on April 25, 2006:

1.  The stockholderselected the eight nominees for director to our Board of Directors.  The eight directors elected, along with thevoting results, are as follows:
|                      | ** ** | **No. of Shares** | ** ** | **No. of Shares** | ** ** |
|----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Name**             | ** ** | **Voting For**         | ** ** | **Withheld Voting**    | ** ** |
| R. Eugene  Cartledge |       | 42,212,446                  |       | 1,711,359                   |       |
| Joshua L.  Collins   |       | 38,430,807                  |       | 5,492,998                   |       |
| Eliot M. Fried       |       | 42,068,764                  |       | 1,855,041                   |       |
| Thomas J.  Fruechtel |       | 42,067,255                  |       | 1,856,550                   |       |
| E. Daniel James      |       | 38,517,314                  |       | 5,406,491                   |       |
| Robert D.  Kennedy   |       | 40,188,324                  |       | 3,735,481                   |       |
| Harold E. Layman     |       | 38,662,979                  |       | 5,260,826                   |       |
| James S. Osterman    |       | 38,709,276                  |       | 5,214,529                   |       |

 

2.  The stockholdersapproved the Blount International, Inc. 2006 Executive Management AnnualIncentive Plan.  The vote was as follows:
| For     |   | 38,123,740 |   |
|---------|--------|------------|--------|
| Against |   | 3,882,234  |   |
| Abstain |   | 15,132     |   |
| No-Vote |   | 1,902,699  |   |

 

3.  The stockholdersapproved the Blount International, Inc. 2006 Equity Incentive Plan.  The vote was as follows:
| For     |   | 34,023,196 |   |
|---------|--------|------------|--------|
| Against |   | 7,881,514  |   |
| Abstain |   | 116,396    |   |
| No-Vote |   | 1,902,699  |   |

 

4.  The stockholdersratified the appointment by our Audit Committee of PricewaterhouseCoopers LLPas the Corporation’s independent auditors. The vote was as follows:
| For     |   | 41,466,028 |   |
|---------|--------|------------|--------|
| Against |   | 2,457,254  |   |
| Abstain |   | 523        |   |

 

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**ITEM 6. EXHIBITS**

**(a) Exhibits:**

**31.1  Certification pursuant to section 302 of theSarbanes-Oxley Act of 2002 by James S. Osterman, Chairman of the Board andChief Executive Officer.

**31.2Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 byCalvin E. Jenness, Senior Vice President and Chief Financial Officer.

**32.1  Certification pursuant to section 906 of theSarbanes-Oxley Act of 2002 by James S. Osterman, Chairman of the Board andChief Executive Officer.

**32.2Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 byCalvin E. Jenness, Senior Vice President and Chief Financial Officer.

**   Filed electronically herewith.  Copies of such exhibits may be obtained uponwritten request from:

Blount International, Inc.

P.O. Box 22127

Portland, Oregon 97269-2127

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**SIGNATURE**

Pursuant to the requirements of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
| BLOUNT INTERNATIONAL,  INC. |   |
|-----------------------------|--------|
| Registrant                  |
|                        |
|                        |
| /s/ Calvin E. Jenness       |   |
| Calvin E. Jenness           |
| Senior Vice President and   |
| Chief Financial Officer     |
|                        |
| Dated: August 8, 2006       |
|                             |        |  |

 

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