**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

**FORM 10-Q**

| **x**      |   | **Quarterly report pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                    |
| ** ** |   | **For the quarterly period ended September 30,  2006.**                                       |
| ** ** |   | ** **                                                                                    |
| **OR**     |
| ** ** |   | ** **                                                                                    |
| **o**      |   | **Transition report pursuant to section 13 or  15(d) of the Securities Exchange Act of 1934** |
| ** ** |   | ** **                                                                                    |

**Commissionfile 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 November 1, 2006** |
|-----------------------|------------|-------------------------------------|
| $0.01 Par Value       |       | 47,213,192  shares                  |

 

 

----

**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**Index**
| Part I   Financial  Information                                                                            |   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                      |   |   |
| Item 1.  Consolidated Financial Statements                                                                                |   |   |
|                                                                                                                      |   |   |
| Unaudited  Consolidated Statements of Income Three and nine months ended September 30,  2006 and 2005                     |   |   |
|                                                                                                                      |   |   |
| Unaudited  Consolidated Balance Sheets September 30, 2006 and December 31, 2005                                           |   |   |
|                                                                                                                      |   |   |
| Unaudited  Consolidated Statements of Cash Flows Nine months ended September 30, 2006  and 2005                           |   |   |
|                                                                                                                      |   |   |
| Unaudited  Consolidated Statement of Changes in Stockholders’ Equity (Deficit) Nine  months ended September 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 6. Exhibits                                                                                                          |   |   |
|                                                                                                                      |   |   |
| Signature                                                                                                                 |   |   |

 

2

----

**PART I       FINANCIAL INFORMATION**

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

**UNAUDITEDCONSOLIDATED STATEMENTS OF INCOME**

**Blount International, Inc. and Subsidiaries**
| ** **                                                                      | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Sales                                                                           |       | $                                                    | 164,097    |                                                | $          | 175,182 |   | $ | 492,993 |   | $ | 525,312 |   |
| Cost of sales                                                                   |       | 114,910                                              |       | 118,453                                             |       | 339,982 |   | 354,259 |   |
| Gross profit                                                                    |       | 49,187                                               |       | 56,729                                              |       | 153,011 |   | 171,053 |   |
| Selling, general and  administrative expenses                                   |       | 25,728                                               |       | 27,122                                              |       | 83,253 |   | 83,072 |   |
| Retirement plan  redesign                                                       |       | 3,747                                                |       |                                                |       | 3,747 |   |   |   |
| Plant closure costs                                                             |       | 1,055                                                |       |                                                |       | 1,055 |   |   |   |
| Operating income                                                                |       | 18,657                                               |       | 29,607                                              |       | 64,956 |   | 87,981 |   |
| Interest income                                                                 |       | 80                                                   |       | 119                                                 |       | 244 |   | 530 |   |
| Interest expense                                                                |       | (8,941                                               | )          | (9,353                                              | )          | (27,229 | ) | (28,006 | ) |
| Other income (expense),  net                                                    |       | (302                                                 | )          | (1,343                                              | )          | 797 |   | (1,826 | ) |
| Income from  continuing operations before income taxes                          |       | 9,494                                                |       | 19,030                                              |       | 38,768 |   | 58,679 |   |
| Provision (benefit) for  income taxes                                           |       | (640                                                 | )          | 3,408                                               |       | 9,901 |   | 10,334 |   |
| Income from  continuing operations                                              |       | 10,134                                               |       | 15,622                                              |       | 28,867 |   | 48,345 |   |
| Discontinued  operations:                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Income before taxes  from discontinued lawnmower segment                        |       | 12,799                                               |       | 407                                                 |       | 12,238 |   | 2,106 |   |
| Income tax provision                                                            |       | 7,809                                                |       | 5                                                   |       | 7,597 |   | 25 |   |
| Income from  discontinued operations                                            |       | 4,990                                                |       | 402                                                 |       | 4,641 |   | 2,081 |   |
| Net income                                                                      |       | $                                                    | 15,124     |                                                | $          | 16,024 |   | $ | 33,508 |   | $ | 50,426 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Basic income per share:                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing  operations                                                          |       | $                                                    | 0.21       |                                                | $          | 0.33 |   | $ | 0.61 |   | $ | 1.06 |   |
| Discontinued  operations                                                        |       | 0.11                                                 |       | 0.01                                                |       | 0.10 |   | 0.04 |   |
| Net income                                                                      |       | $                                                    | 0.32       |                                                | $          | 0.34 |   | $ | 0.71 |   | $ | 1.10 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted income per  share:                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing  operations                                                          |       | $                                                    | 0.21       |                                                | $          | 0.33 |   | $ | 0.60 |   | $ | 1.02 |   |
| Discontinued  operations                                                        |       | 0.11                                                 |       | 0.01                                                |       | 0.10 |   | 0.04 |   |
| Net income                                                                      |       | $                                                    | 0.32       |                                                | $          | 0.34 |   | $ | 0.70 |   | $ | 1.06 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares  used in per share calculations:                        |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                           |       | 47,161                                               |       | 46,610                                              |       | 47,121 |   | 45,801 |   |
| Diluted                                                                         |       | 47,841                                               |       | 47,602                                              |       | 47,889 |   | 47,445 |   |

 

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

3

----

**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

**Blount International, Inc. and Subsidiaries **
| ** **                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share data)**                                                       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                                                                                                         |       |                   |       |                  |       |
| **Assets**                                                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                              |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                    |       | $                      | 11,794     |                  | $          | 12,937 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $2,137 and $2,239 respectively                               |       | 102,300                |       | 93,593                |       |
| Inventories, net                                                                                                             |       | 84,569                 |       | 85,274                |       |
| Deferred income taxes                                                                                                        |       | 19,541                 |       | 28,551                |       |
| Other current assets                                                                                                         |       | 5,420                  |       | 6,250                 |       |
| Total current assets                                                                                                         |       | 223,624                |       | 226,605               |       |
| Property, plant  and equipment, net                                                                                          |       | 96,936                 |       | 101,538               |       |
| Goodwill                                                                                                                     |       | 71,892                 |       | 76,891                |       |
| Deferred  financing costs                                                                                                    |       | 15,553                 |       | 17,603                |       |
| Deferred income  taxes                                                                                                       |       | 12,440                 |       | 12,233                |       |
| Assets held for  sale                                                                                                        |       | 2,700                  |       |                  |       |
| Other assets                                                                                                                 |       | 17,900                 |       | 20,322                |       |
| Total Assets                                                                                                                 |       | $                      | 441,045    |                  | $          | 455,192 |   |
|                                                                                                                         |       |                   |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                        |       |                   |       |                  |       |
| Current maturities of long-term debt                                                                                         |       | $                      | 1,500      |                  | $          | 2,360 |   |
| Accounts payable                                                                                                             |       | 33,496                 |       | 41,224                |       |
| Accrued expenses                                                                                                             |       | 66,749                 |       | 69,692                |       |
| Other current liabilities                                                                                                    |       | 599                    |       | 1,115                 |       |
| Total current liabilities                                                                                                    |       | 102,344                |       | 114,391               |       |
| Long-term debt,  excluding current maturities                                                                                |       | 375,750                |       | 405,363               |       |
| Deferred income  taxes                                                                                                       |       | 4,571                  |       | 4,250                 |       |
| Employee  benefits                                                                                                           |       | 52,636                 |       | 65,853                |       |
| Other  liabilities                                                                                                           |       | 12,396                 |       | 10,522                |       |
| Total  liabilities                                                                                                           |       | 547,697                |       | 600,379               |       |
| Commitments and  contingent liabilities                                                                                      |       |                   |       |                  |       |
| Stockholders’  equity (deficit):                                                                                        |       |                   |       |                  |       |
| Common stock: par value $0.01 per share, 100,000,000  shares authorized, 47,167,192 and 47,004,292 outstanding, respectively |       | 472                    |       | 470                   |       |
| Capital in excess of par value of stock                                                                                      |       | 570,758                |       | 566,692               |       |
| Accumulated deficit                                                                                                          |       | (670,042               | )          | (703,550              | )          |
| Accumulated other comprehensive loss                                                                                         |       | (7,840                 | )          | (8,799                | )          |
| Total  stockholders’ (deficit)                                                                                          |       | (106,652               | )          | (145,187              | )          |
| Total Liabilities and  Stockholders’ Deficit                                                                            |       | $                      | 441,045    |                  | $          | 455,192 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

4

----

**UNAUDITEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**
| ** **                                                                                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                                                                       | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                                                 |       |                                                    |       |   |   |
| Income from continuing  operations                                                                         |       | $                                                       | 28,867     |   | $ | 48,345 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided by operating  activities: |       |                                                    |       |   |   |
| Depreciation of property, plant and equipment                                                              |       | 12,656                                                  |       | 11,287 |   |
| Amortization, stock compensation and other non-cash  charges                                               |       | 8,866                                                   |       | 4,395 |   |
| Excess tax benefit from share-based compensation                                                           |       | (532                                                    | )          |   |   |
| Deferred income taxes                                                                                      |       | 4,013                                                   |       | 137 |   |
| Loss (gain) on disposal of property, plant, and  equipment                                                 |       | 598                                                     |       | (423 | ) |
| Changes in assets and liabilities:                                                                         |       |                                                    |       |   |   |
| (Increase) decrease in accounts receivable                                                                 |       | (10,795                                                 | )          | (14,824 | ) |
| (Increase) decrease in inventories                                                                         |       | (5,338                                                  | )          | (10,529 | ) |
| (Increase) decrease in other assets                                                                        |       | (22                                                     | )          | (1,832 | ) |
| Increase (decrease) in accounts payable                                                                    |       | (5,549                                                  | )          | 307 |   |
| Increase (decrease) in accrued expenses                                                                    |       | (8,148                                                  | )          | (3,605 | ) |
| Increase (decrease) in other liabilities                                                                   |       | (8,797                                                  | )          | 3,418 |   |
| Discontinued operations                                                                                    |       | (3,668                                                  | )          | (1,060 | ) |
| Net cash provided by operating activities                                                                  |       | 12,151                                                  |       | 35,616 |   |
| ** **                                                                                                 |       |                                                    |       |   |   |
| **Cash  flows from investing activities:**                                                                 |       |                                                    |       |   |   |
| Proceeds from  sale of property, plant and equipment                                                       |       | 104                                                     |       | 933 |   |
| Acquisition of  business                                                                                   |       | (503                                                    | )          |   |   |
| Purchases of  property, plant and equipment                                                                |       | (15,563                                                 | )          | (13,552 | ) |
| Discontinued  operations                                                                                   |       | 32,644                                                  |       | (594 | ) |
| Net cash provided by (used in) investing activities                                                        |       | 16,682                                                  |       | (13,213 | ) |
| ** **                                                                                                 |       |                                                    |       |   |   |
| **Cash  flows from financing activities:**                                                                 |       |                                                    |       |   |   |
| Net borrowings  under revolving credit facility                                                            |       | 53,000                                                  |       |   |   |
| Repayment of  term loan principal                                                                          |       | (83,473                                                 | )          | (47,792 | ) |
| 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                                                          |       | 532                                                     |       |   |   |
| Proceeds from  exercise of stock options                                                                   |       | 665                                                     |       | 6,576 |   |
| Net cash used in financing activities                                                                      |       | (29,976                                                 | )          | (45,195 | ) |
|                                                                                                       |       |                                                    |       |   |   |
| Net decrease in  cash and cash equivalents                                                                 |       | (1,143                                                  | )          | (22,792 | ) |
| Cash and cash  equivalents at beginning of period                                                          |       | 12,937                                                  |       | 48,570 |   |
| Cash and cash  equivalents at end of period                                                                |       | $                                                       | 11,794     |   | $ | 25,778 |   |

 

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

5

----

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

**BlountInternational, Inc. and Subsidiaries**
| **(Amounts in thousands)**    | ** ** | **Shares**               | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income   (Loss)** | ** ** | **Total**  | ** ** |
|-----------------------------------------|------------|--------------------------|------------|-------------------|------------|------------------------------------------|------------|--------------------------|------------|-------------------------------------------------------------|------------|------------|------------|
| ** **                              | ** ** | **(in 000’s)** | ** ** | ** **        | ** ** | ** **                               | ** ** | ** **               | ** ** | ** **                                                  | ** ** | ** ** | ** ** |
|                                    |       |                     |       |              |       |                                     |       |                     |       |                                                        |       |       |       |
| Balance December  31, 2005              |       | 47,004                   |       | $                 | 470        |                                     | $          | 566,692                  |       | $                                                           | (703,550   | )          | $          | (8,799 | ) | $ | (145,187 | ) |
|                                    |       |                     |       |              |       |                                     |       |                     |       |                                                        |       |       |       |
| Net income                              |       |                     |       |              |       |                                     |       | 33,508                   |       |                                                        |       | 33,508     |       |
| Other comprehensive income (loss):      |       |                     |       |              |       |                                     |       |                     |       |                                                        |       |       |       |
| Foreign currency translation adjustment |       |                     |       |              |       |                                     |       |                     |       | 1,038                                                       |       | 1,038      |       |
| Unrealized losses                       |       |                     |       |              |       |                                     |       |                     |       | (35                                                         | )          | (35        | )          |
| Minimum pension liability adjustment    |       |                     |       |              |       |                                     |       |                     |       | (44                                                         | )          | (44        | )          |
| Comprehensive income, net               |       |                     |       |              |       |                                     |       |                     |       |                                                        |       | 34,467     |       |
| Exercise of stock options               |       | 163                      |       | 2                 |       | 1,195                                    |       |                     |       |                                                        |       | 1,197      |       |
| Stock compensation expense              |       |                     |       |              |       | 2,871                                    |       |                     |       |                                                        |       | 2,871      |       |
| Balance September 30,  2006             |       | 47,167                   |       | $                 | 472        |                                     | $          | 570,758                  |       | $                                                           | (670,042   | )          | $          | (7,840 | ) | $ | (106,652 | ) |

 

Other comprehensive income for the three and nine monthsended September 30, 2006 was $0.2 million and $1.0 million, respectively.  Other comprehensive loss for the three andnine months ended September 30, 2005 was $0.1 million and $2.3 million,respectively.

Theaccompanying notes are an integral part of these consolidated financialstatements.

6

----

**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 September 30, 2006 andfor the three and nine months ended September 30, 2006 and September 30, 2005has been prepared by the Company, without audit, pursuant to the rules andregulations of the United States Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations. The December31, 2005 consolidated balance sheet was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America. Theseconsolidated financial statements should be read in conjunction with theconsolidated financial statements and 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.  The Company bases its estimateson various assumptions that are believed to be reasonable under thecircumstances.  Management is continuallyevaluating and updating these estimates and it is reasonably possible thatthese estimates will change 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, DIVESTITURES AND DISCONTINUED OPERATIONS**

***Discontinued Lawnmower Segment.***  On July 27, 2006, the Company sold certain ofthe assets and liabilities of Dixon Industries, Inc. (“Dixon”) to HusqvarnaProfessional Outdoor Products, Inc. (“Husqvarna”), a wholly-owned subsidiary ofHusqvarna AB (Sweden).  Dixon hadpreviously been reported as the Company’s Lawnmower Segment.  The Company received preliminary cashproceeds of $33.9 million on July 27, 2006 which were applied to theoutstanding principal balance of the revolving credit facility.  The final purchase price is subject toadjustment as specified in the related asset purchase agreement. Certainliabilities of Dixon, as well as the land, building, building improvements,certain machinery and equipment and various other assets related to itsCoffeyville, Kansas facility, were retained by the Company by merger of Dixonwith and into 4520 Corp. Inc., an indirect wholly-owned subsidiary of theCompany.   The net property, plant andequipment associated with the discontinued operations of Dixon are carried attheir estimated fair value and are included in assets held for sale in theconsolidated balance sheet.  The land andbuilding are currently being marketed for sale by the Company.

7

----

Discontinued operations are summarized as follows:
| ** **                                               | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)**                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Sales                                                    |       | $                                                    | 2,995      |                                                | $          | 11,513 |   | $ | 29,510 |   | $ | 40,391 |   |
| Operating income  (loss)                                 |       | (4,889                                               | )          | 407                                                 |       | (5,450 | ) | 2,106 |   |
| Gain on  disposition of net assets                       |       | 17,688                                               |       |                                                |       | 17,688 |   |   |   |
| Income before  taxes from discontinued lawnmower segment |       | 12,799                                               |       | 407                                                 |       | 12,238 |   | 2,106 |   |
| Income tax  provision                                    |       | 7,809                                                |       | 5                                                   |       | 7,597 |   | 25 |   |
| Income from  discontinued operations                     |       | $                                                    | 4,990      |                                                | $          | 402 |   | $ | 4,641 |   | $ | 2,081 |   |

 

Included in operating income (loss) for the three and ninemonths ended September 30, 2006 are charges totaling $4.7 million and $7.0million, respectively, for employee severance and benefits costs, impairment ofassets and transition costs.

***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 the design, manufacture and distribution of harvester heads for use intimber harvesting equipment.  Thepurchase agreement includes additional contingent royalty payments of up to$0.8 million, depending on the number of harvesting heads sold over a four yearperiod from the date of acquisition. Such royalty payments are expensed as incurred to cost of sales in theconsolidated statements of income.

***Plant Closure Costs.***  On August 8, 2006, the Company announcedplans to close a manufacturing plant located in Menominee, Michigan, and shiftproduction of the affected products to other manufacturing plants within theIndustrial and Power Equipment segment during the fourth quarter of 2006. Thisplant closure resulted in a pre-tax charge of $1.1 million in the three andnine months ended September 30, 2006, for asset impairment, employee severanceand other closure costs.  As of September30, 2006, $0.1 million remains in accrued liabilities pertaining to thesecharges.

**NOTE 3: INVENTORIES, NET**

Inventories consisted of the following:
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Raw materials  and supplies          |       | $                      | 26,804     |                  | $          | 29,254 |   |
| Work in progress                     |       | 14,529                 |       | 14,276                |       |
| Finished goods                       |       | 43,236                 |       | 41,744                |       |
| Total inventories                    |       | $                      | 84,569     |                  | $          | 85,274 |   |

 

As discussed in Note 2, the Company sold its LawnmowerSegment business, including all related inventory, on July 27, 2006.  The December 31, 2005 amounts in thepreceding table include $6.3 million of inventories related to thisdiscontinued operation.

8

----

**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 nine months endedSeptember 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          |       | (2,750     | )          |
| Balance at September  30, 2006       |       | $          | 15,553     |   |

 

Estimated remaining amortization by year, assuming no furtherpre-payments of term loan principal, is as follows:
| **(Amounts in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | **Estimated  Amortization  by Year** | ** ** |   |
|--------------------------------------|------------|------------|------------|------------|------------|-------------------------------------------|------------|--------|
| 2006                                 |       |       |       |       |       | $                                         | 980        |   |
| 2007                                 |       |       |       |       |       | 3,922                                     |       |
| 2008                                 |       |       |       |       |       | 3,922                                     |       |
| 2009                                 |       |       |       |       |       | 3,250                                     |       |
| 2010 and beyond                      |       |       |       |       |       | 3,479                                     |       |
| Total amortization                   |       |       |       |       |       | $                                         | 15,553     |   |
|                                      |            |            |            |            |            |                                           |            |        |  |  |

 

**NOTE 5: LONG TERM DEBT**

Long-term debt consisted of the following:
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Revolving credit  facility           |       | $                      | 53,000     |                  |       |   |
| Term loans                           |       | 149,250                |       | $                     | 232,723    |   |
| 8 7/8% senior  subordinated notes    |       | 175,000                |       | 175,000               |       |
| Total debt                           |       | 377,250                |       | 407,723               |       |
| Less current  maturities             |       | (1,500                 | )          | (2,360                | )          |
| Long-term debt                       |       | $                      | 375,750    |                  | $          | 405,363 |   |

 

As of September 30, 2006, minimum principal payments requiredare as follows:
| **(Amounts in thousands)** | ** ** | **Payments** | ** ** |
|--------------------------------------|------------|--------------|------------|
| 2006                                 |       | $            | 375        |   |
| 2007                                 |       | 1,500        |       |
| 2008                                 |       | 1,500        |       |
| 2009                                 |       | 54,500       |       |
| 2010                                 |       | 144,375      |       |
| 2011 and beyond                      |       | 175,000      |       |
| Total debt                           |       | $            | 377,250    |   |

 

The weighted average interest rate on outstanding debt as of September30, 2006was 7.97%.

9

----

**2006 Amendment to Credit Facilities.**  On March 23, 2006, the Company amendedcertain terms of the senior credit facilities of its wholly-owned subsidiary,Blount, Inc.  This amendment included thefollowing 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 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 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 September 30, 2006, the Company had theability to borrow an additional $91.1 million under the terms of the revolvingcredit agreement. The revolving credit facility bears interest at the LIBORrate plus 1.75%, or at the prime rate, depending on the type of loan, andmatures on August 9, 2009.  Interest ispayable monthly in arrears on any prime rate borrowing and at the individualmaturity dates for any LIBOR-based borrowing. 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 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 of Blount,Inc. and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’scapital stock held by Blount International, Inc. and all of the stock ofdomestic subsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of its non-domesticsubsidiaries 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 or assets.  The Company was in compliance with all debtcovenants as of September 30, 2006.

10

----

**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 1989 through 2003, a domesticfederal capital loss carryforward from 2002 and other book expenses not thencurrently 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 would 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 nine months ended September30, 2005 primarily consisted of foreign, state and local taxes, with minimalfederal tax expense recognized.  Theincome tax provision for the three and nine months ended September 30, 2006consisted of federal, foreign, state and local taxes.  The Company recorded an income tax benefit of$0.6 million in the three months ended September 30, 2006, primarily due to theyear-to-date effects of implemented tax planning initiatives.  The Company continues to utilize its variousfederal and state net operating loss and tax credit carryforwards to reduce theamount of cash tax payments required.  Asof September 30, 2006, the estimated federal net operating loss carryforwardremaining was approximately $26.4 million.

**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 September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Pension Benefits**                                | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)**                          | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                                  |       | $                                                        | 1,470      |   | $ | 1,460 |   | $ | 86 |   | $ | 112 |   |
| Interest cost                                                 |       | 2,518                                                    |       | 2,392 |   | 428 |   | 572 |   |
| Expected return  on plan assets                               |       | (2,900                                                   | )          | (2,404 | ) | (4 | ) | (11 | ) |
| Immediate  recognition and amortization of prior service cost |       | 3,636                                                    |       | 93 |   | 3 |   | 2 |   |
| Amortization of  net actuarial loss                           |       | 396                                                      |       | 648 |   | 143 |   | 332 |   |
| Total net periodic benefit  cost                              |       | $                                                        | 5,120      |   | $ | 2,189 |   | $ | 656 |   | $ | 1,007 |   |

 
| ** **                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Pension Benefits**                               | ** ** | **Other Post-Retirement  Benefits** | ** ** |
| **(Amounts in thousands)**                          | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                                  |       | $                                                       | 4,867      |   | $ | 4,378 |   | $ | 258 |   | $ | 337 |   |
| Interest cost                                                 |       | 7,691                                                   |       | 7,176 |   | 1,284 |   | 1,715 |   |
| Expected return  on plan assets                               |       | (8,692                                                  | )          | (7,211 | ) | (12 | ) | (33 | ) |
| Immediate  recognition and amortization of prior service cost |       | 3,813                                                   |       | 279 |   | 7 |   | 7 |   |
| Amortization of  net actuarial loss                           |       | 2,076                                                   |       | 1,944 |   | 430 |   | 995 |   |
| Total net periodic  benefit cost                              |       | $                                                       | 9,755      |   | $ | 6,566 |   | $ | 1,967 |   | $ | 3,021 |   |

 

11

----

TheCompany recorded a pension curtailment charge of $0.3 million in discontinuedoperations for the three months ended June 30, 2006.  This charge represented the portion ofunamortized prior service cost related to the employees of the discontinuedoperations.

InAugust 2006, the Company announced a redesign of its domestic retirement plans,including the following changes:

·                  As of December31, 2006, the Company will freeze its defined benefit pension plan and theassociated nonqualified plan.  As ofJanuary 1, 2007, employees who currently participate in the plans will ceaseaccruing benefits and new employees will not be eligible to participate.  All retirement benefits accrued up to thetime of the freeze will be preserved.

·                  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.  In addition, the Company will continue tomatch employee contributions to 401(k) accounts up to 4.5% of basecompensation.

Accordingly,the Company recorded a pension curtailment charge of $3.2 million in the threeand nine months ended September 30, 2006, which represented the immediaterecognition of the unamortized prior service cost for domestic employees and isreflected in the tables above.  TheCompany has incurred approximately $0.5 million for related fees and costsassociated with the changes to its retirement plans.  The Company expects to contribute atotal of approximately $18.2 million to its funded pension plans during 2006.

**NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES**

Guarantees and other commercial commitments are summarized inthe following table: 
| ** **                              | ** ** | **September 30,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| **(Amounts in thousands)**    | ** ** | **2006**               | ** ** |
| Warranty reserve                        |       | $                      | 3,449      |   |
| Letters of  credit outstanding          |       | 5,935                  |       |
| Third party  financing agreements (1)   |       | 2,899                  |       |
| Accounts  receivable securitization (2) |       | 150                    |       |
|                                         |            |                        |            |  |

 

----

(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:  
| ** **                                           | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(Amounts in thousands)**                 | ** ** | **2006**                                        | ** ** |
| Balance at  December 31, 2005                        |       | $                                               | 4,888      |   |
| Warranty reserve  related to discontinued operations |       | (976                                            | )          |
| Accrued warranty  expense                            |       | 2,310                                           |       |
| Payments made  (in cash or in-kind)                  |       | (2,773                                          | )          |
| Balance at September  30, 2006                       |       | $                                               | 3,449      |   |

 

The warranty reserve is included in accrued expenses on theconsolidated balance sheet.  The warrantyreserve that was related to discontinued operations was assumed by Husqvarna aspart of the asset purchase agreement (see Note 2).  In addition to these amounts, the Companyalso guarantees certain debt of its subsidiaries (see Note 13).

12

----

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 product recall programs in which certain identified products aredetermined to be potentially dangerous to use and are recalled and replaced orrepaired. The Company initiated a voluntary recall of certain lawnmower bladesduring the three months ended September 30, 2006.  In addition, the Company is a party to anumber of commercial or contractual suits arising out of the normal course ofits business. While there can be no assurance as to their ultimate outcome,management does not believe these lawsuits, proceedings and programs, alone orin the aggregate, will have a material adverse effect on the Company’sconsolidated 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 then known currentcircumstances.

**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 September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Shares in thousands)**                                                                                  | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Shares for basic  income per share computation – weighted average common shares outstanding                     |       | 47,161                                               |       | 46,610                                              |       | 47,121 |   | 45,801 |   |
| Dilutive effect  of stock options, stock appreciation rights and warrants                                            |       | 680                                                  |       | 992                                                 |       | 768 |   | 1,644 |   |
| Shares for  diluted income per share computation                                                                     |       | 47,841                                               |       | 47,602                                              |       | 47,889 |   | 47,445 |   |
| Options and stock  appreciation rights excluded from computation as anti-dilutive because they  are out-of-the-money |       | 1,945                                                |       | 7                                                   |       | 1,831 |   | 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)”). SFAS No. 123(R) requires all share-based compensation toemployees, directors and others who perform services for the Company, includinggrants of stock options and stock appreciation rights (“SARs”), to be valued atfair value on the date of grant and to be expensed over the applicable serviceperiod. Under SFAS No. 123(R), pro forma disclosure of the income statementeffects of share-based compensation is no longer an alternative to expenserecognition.  The adoption of SFAS No.123(R) resulted in a reduction in income before taxes of $0.7 million and $2.9million, and a reduction in income from continuing operations and net income of$0.4 million and $1.8 million, in the three and nine months ended September 30,2006, respectively.  The adoption of SFAS123(R) reduced basic and diluted earnings per share by $0.01 and $0.04 for thethree and nine months ended September 30, 2006, respectively.  Under the modified prospective applicationmethod, the results for prior periods have not been restated.

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 could be either incentive stockoptions or non-qualified stock options. Options and SARs generally vested inequal installments over a three year period and expire ten years from the dateof grant.Thenumber of shares that could have been issued under these two plans could notexceed an aggregate of 5,875,000 shares.

13

----

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 sharesthat remained unused under the 1999 and 2000 plans that were transferred to the2006 Plan.  The maximum number ofincentive stock 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.

The fair value of options and SARs was estimated on theirrespective grant dates using the Black-Scholes option valuation model. The estimatedaverage life of SARs granted in 2006 was derived from the “simplified” methoddescribed in SEC Staff Accounting Bulletin No. 107 (“SAB 107”). The expectedaverage life for options granted in 2005 was based on historical data andmanagement estimate.  The risk-freeinterest rate is based on the implied yield available on U.S. Treasuryzero-coupon issues with the remaining term equal to the average life.  The expected volatility factors used arebased on the historical volatility of the Company’s stock.  The expected dividend yield is based onhistorical information and management estimate.

The following assumptions were used to estimate fair value:
| ** **                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Estimated  average life                 |       | n/a                                                      |       | n/a                                                     |       | 6  years |   | 5  years |   |
| Risk-free  interest rate                |       | n/a                                                      |       | n/a                                                     |       | 4.6% |   | 3.8% |   |
| Expected  volatility                    |       | n/a                                                      |       | n/a                                                     |       | 26.7% |   | 43.0%  - 43.9% |   |
| Weighted average  volatility            |       | n/a                                                      |       | n/a                                                     |       | 26.7% |   | 43.3% |   |
| Dividend yield                          |       | n/a                                                      |       | n/a                                                     |       | 0.0% |   | 0.0% |   |
| Weighted average grant  date fair value |       | n/a                                                      |       | n/a                                                     |       | $6.09 |   | $7.21 |   |

 

A summary of stock option and stock-settled SARs activity forthe nine months ended September 30, 2006 is presented in the following table:
| ** **                                     | ** ** | **Nine Months Ended September 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                             |       | (163                                                              | )          | 4.08 |   |   |   |   |   |
| Options Forfeited                              |       | (32                                                               | )          | 8.17 |   |   |   |   |   |
| Outstanding  options and SARs at end of period |       | 3,535                                                             |       | 10.77 |   | 6.1 |   | $ | 8,956 |   |
|                                           |       |                                                              |       |   |   |   |   |   |   |
| Outstanding  options at end of period          |       | 2,923                                                             |       | 9.51 |   | 5.4 |   | 8,956 |   |
| Outstanding SARs  at end of period             |       | 612                                                               |       | 16.76 |   | 9.1 |   | zero |   |
|                                           |       |                                                              |       |   |   |   |   |   |   |
| Options exercisable  at end of period          |       | 2,585                                                             |       | 8.58 |   | 5.0 |   | $ | 8,956 |   |
| SARs exercisable at end  of period             |       | 20                                                                |       | $ | 16.76 |   | 0.8 |   | zero |   |

 

14

----

 
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in “000’s)**                       | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Intrinsic value  of options exercised                             |       | $                                                        | 117        |                                                    | $          | 2,251 |   | $ | 1,857 |   | $ | 8,131 |   |
| Estimated fair  value of options and SARs which vested            |       | 38                                                       |       | zero                                                    |       | 191 |   | zero |   |
| Share-based  compensation cost recognized in income               |       | 699                                                      |       | zero                                                    |       | 2,871 |   | 67 |   |
| Total tax  benefit related to share-based compensation recognized |       | 232                                                      |       | zero                                                    |       | 935 |   | 11 |   |
| Total amount of  cash received from options exercised             |       | 72                                                       |       | 3,129                                                   |       | 665 |   | 6,566 |   |
| Tax benefit  realized from stock options exercised                |       | 44                                                       |       | zero                                                    |       | 532 |   | zero |   |
| Cash used to settle  equity instruments                           |       | zero                                                     |       | zero                                                    |       | zero |   | zero |   |
|                                                                   |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |

 

As of September 30, 2006, the total compensation cost relatedto awards not yet recognized was $2.3 million. The weighted-average period overwhich this expense is expected to be recognized is 1.1 years.  The Company’s policy upon the exercise ofoptions or SARs has been to issue new shares into the market place.

Undercertain conditions, stock options, SARs and restricted stock granted by theCompany are eligible for continued vesting upon the retirement of the employee.SFAS No. 123(R) clarifies that the fair value of such stock-basedcompensation should be expensed based on an accelerated service period, orimmediately, rather than ratably over the vesting period stated in the grant,for employees who are retirement eligible prior to the completion of the vestingperiod. Prior to the adoption of SFAS No. 123(R), the Company’s pro formadisclosure reflected the expense of such options ratably over the statedvesting period. The SEC has recentlyclarified that companies should continue to follow the expense amortizationmethod that they have been using for pro forma disclosure prior to adoption ofSFAS No. 123(R), and then apply the accelerated amortization schedule toall subsequent grants to those employees that became eligible for retirementwithin the vesting period. Had the Company been accounting for such stockoptions using the accelerated amortization schedule for those employees thatwere eligible for retirement or became eligible for retirement within thevesting period, the effect on stock-based compensation expense in the pro formadisclosure for the three and nine months ended September 30, 2005 would nothave been material.  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 nine months ended September 30, 2006 was anincrease of $0.1 million and an increase of $1.1 million, respectively.

Thefollowing table shows the effect on net earnings and earnings per share hadcompensation cost been recognized based upon the fair value at the grant datesin accordance with SFAS No. 123 and SFAS No. 148 “Accounting for Stock-BasedCompensation – Transition and Disclosure – an Amendment of FASB Statement No.123”.
| ** **                                                                                                                              | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands, except per share amounts)**                                                      | ** ** | **2005**                                             | ** ** | **2005**                                            | ** ** |
| Net income as  reported                                                                                                                 |       | $                                                    | 16,024     |                                                | $          | 50,426 |   |
| Add: stock-based employee compensation cost, net of  tax, included in the reported results                                              |       |                                                 |       | 56                                                  |       |
| Deduct: total stock-based employee compensation  cost, net of tax, that would have been included in net income under fair  value method |       | (191                                                 | )          | (587                                                | )          |
| Pro forma net  income                                                                                                                   |       | $                                                    | 15,833     |                                                | $          | 49,895 |   |
|                                                                                                                                    |       |                                                 |       |                                                |       |
| Basic earnings  per share as reported                                                                                                   |       | $                                                    | 0.34       |                                                | $          | 1.10 |   |
| Pro forma basic  earnings per share                                                                                                     |       | $                                                    | 0.34       |                                                | $          | 1.09 |   |
| Diluted earnings  per share as reported                                                                                                 |       | $                                                    | 0.34       |                                                | $          | 1.06 |   |
| Pro forma diluted  earnings per share                                                                                                   |       | $                                                    | 0.33       |                                                | $          | 1.05 |   |

*** ***

15

----

***Restricted Stock Awards.***  On August 24, 2006, the Company awarded35,256 shares of restricted stock to an executive officer.  The restricted stock had a fair value of $0.3million on the grant date and vests two thirds after two years and one thirdafter three years from the grant date. This award resulted in the immediate recognition of $0.3 million incompensation expense in the three and nine months ended September 30, 2006,because the executive officer was retirement eligible on the grant date.

**NOTE 11: SEGMENT INFORMATION**

The Company identifies operating segments primarily based onmanagement responsibility. The Company has two operating segments, each ofwhich is a reportable segment: Outdoor Products and Industrial and PowerEquipment.  See also Note 2 regarding thediscontinuation of the former Lawnmower segment business. Outdoor Productsmanufactures and markets cutting chain, bars, sprockets and accessories forchainsaw use, concrete cutting equipment, lawnmower blades and accessories foryard care equipment. Industrial and Power Equipment manufactures and marketstimber harvesting equipment, timber harvesting heads, industrial tractors andloaders, rotation bearings and swing drives.

Certain financial information by segment is presented in thetable below:
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Sales:**                           |       |                                                 |       |                                                |       |   |   |   |   |
| Outdoor Products                     |       | $                                                    | 111,481    |                                                | $          | 108,855 |   | $ | 340,400 |   | $ | 339,748 |   |
| Industrial and  Power Equipment      |       | 52,747                                               |       | 66,659                                              |       | 153,226 |   | 186,362 |   |
| Inter-segment  elimination           |       | (131                                                 | )          | (332                                                | )          | (633 | ) | (798 | ) |
| Total sales                          |       | $                                                    | 164,097    |                                                | $          | 175,182 |   | $ | 492,993 |   | $ | 525,312 |   |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating  income:**               |       |                                                 |       |                                                |       |   |   |   |   |
| Outdoor Products                     |       | $                                                    | 23,532     |                                                | $          | 25,244 |   | $ | 71,437 |   | $ | 80,527 |   |
| Industrial and  Power Equipment      |       | 3,949                                                |       | 8,187                                               |       | 11,980 |   | 19,373 |   |
| Inter-segment  elimination           |       | 56                                                   |       | 10                                                  |       | 29 |   | (20 | ) |
| Contribution  from segments          |       | 27,537                                               |       | 33,441                                              |       | 83,446 |   | 99,880 |   |
| Corporate  expenses                  |       | (4,078                                               | )          | (3,834                                              | )          | (13,688 | ) | (11,899 | ) |
| Retirement plan  redesign            |       | (3,747                                               | )          |                                                |       | (3,747 | ) |   |   |
| Plant closure  costs                 |       | (1,055                                               | )          |                                                |       | (1,055 | ) |   |   |
| Operating income                     |       | $                                                    | 18,657     |                                                | $          | 29,607 |   | $ | 64,956 |   | $ | 87,981 |   |

 

**NOTE 12: SUPPLEMENTAL CASH FLOWS INFORMATION**
| ** **                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Interest paid                        |       | $                                                   | 29,255     |   | $ | 25,737 |   |
| Income taxes paid, net               |       | $                                                   | 6,871      |   | $ | 9,569 |   |

 

**NOTE 13: CONSOLIDATING FINANCIAL INFORMATION**

See Note 5 for adiscussion 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

----

**Condensed Consolidating Statement of OperationsInformation**
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the Three Months Ended  September 30, 2006**            |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       |                             |       | $                 | 114,885    |                        | $          | 24,061                            |       | $                | 71,935     |             | $          | (46,784 | ) | $ | 164,097 |   |
| Cost of sales                                                 |       |                             |       | 78,681            |       | 15,255                      |       | 53,132                            |       | (32,158          | )          | 114,910          |       |
| Gross profit                                                  |       |                             |       | 36,204            |       | 8,806                       |       | 18,803                            |       | (14,626          | )          | 49,187           |       |
| Operating expenses                                            |       |                             |       | 21,362            |       | 2,038                       |       | 7,130                             |       |             |       | 30,530           |       |
| Operating income                                              |       |                             |       | 14,842            |       | 6,768                       |       | 11,673                            |       | (14,626          | )          | 18,657           |       |
| Other, net                                                    |       | $                                | (5,896     | )                 | (4,471     | )                           | 678        |                              | 526        |             |       |             | (9,163     | ) |
| Income (loss) from  continuing operations before income taxes |       | (5,896                           | )          | 10,371            |       | 7,446                       |       | 12,199                            |       | (14,626          | )          | 9,494            |       |
| Provision (benefit) for  income taxes                         |       | (2,393                           | )          | (4,715            | )          | 5,255                       |       | 1,213                             |       |             |       | (640             | )          |
| Income (loss) from  continuing operations                     |       | (3,503                           | )          | 15,086            |       | 2,191                       |       | 10,986                            |       | (14,626          | )          | 10,134           |       |
| Income (loss) from  discontinued operations                   |       |                             |       |              |       | 4,990                       |       |                              |       |             |       | 4,990            |       |
| Equity in earnings of  affiliated companies                   |       | 18,627                           |       | 3,541             |       | 88                          |       |                              |       | (22,256          | )          |             |       |
| Net income                                                    |       | $                                | 15,124     |              | $          | 18,627                      |       | $                                 | 7,269      |             | $          | 10,986           |       | $ | (36,882 | ) | $ | 15,124 |   |

 
| **For the Nine Months Ended  September 30, 2006**             |   |    |    |    |    |   |   |    |   |     |    |    |    |
|---------------------------------------------------------------|--------|---------|---------|---------|---------|--------|--------|---------|--------|----------|---------|---------|---------|
| Sales                                                         |   |    |    | $       | 349,771 |   | $      | 79,608  |   | $        | 211,547 |    | $       | (147,933 | ) | $ | 492,993 |   |
| Cost of sales                                                 |   |    |    | 254,792 |    | 58,898 |   | 160,963 |   | (134,671 | )       | 339,982 |    |
| Gross profit                                                  |   |    |    | 94,979  |    | 20,710 |   | 50,584  |   | (13,262  | )       | 153,011 |    |
| Operating expenses                                            |   |    |    | 60,169  |    | 6,079  |   | 21,807  |   |     |    | 88,055  |    |
| Operating income                                              |   |    |    | 34,810  |    | 14,631 |   | 28,777  |   | (13,262  | )       | 64,956  |    |
| Other, net                                                    |   | $       | (16,923 | )       | (9,591  | )      | 347    |    | (21    | )        |    |    | (26,188 | ) |
| Income (loss) from  continuing operations before income taxes |   | (16,923 | )       | 25,219  |    | 14,978 |   | 28,756  |   | (13,262  | )       | 38,768  |    |
| Provision (benefit) for  income taxes                         |   | (6,363  | )       | 4,398   |    | 5,632  |   | 6,234   |   |     |    | 9,901   |    |
| Income (loss) from  continuing operations                     |   | (10,560 | )       | 20,821  |    | 9,346  |   | 22,522  |   | (13,262  | )       | 28,867  |    |
| Income (loss) from  discontinued operations                   |   |    |    |    |    | 4,641  |   |    |   |     |    | 4,641   |    |
| Equity in earnings of  affiliated companies                   |   | 44,068  |    | 23,247  |    | 294    |   |    |   | (67,609  | )       |    |    |
| Net income                                                    |   | $       | 33,508  |    | $       | 44,068 |   | $       | 14,281 |     | $       | 22,522  |    | $ | (80,871 | ) | $ | 33,508 |   |

** **

17

----

 
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the  Three Months Ended September 30, 2005**            |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       |                             |       | $                 | 126,716    |                        | $          | 30,998                            |       | $                | 65,663     |             | $          | (48,195 | ) | $ | 175,182 |   |
| Cost of sales                                                 |       |                             |       | 95,154            |       | 20,974                      |       | 50,513                            |       | (48,188          | )          | 118,453          |       |
| Gross profit                                                  |       |                             |       | 31,562            |       | 10,024                      |       | 15,150                            |       | (7               | )          | 56,729           |       |
| Selling, general  and administrative expenses                 |       |                             |       | 14,200            |       | 5,528                       |       | 7,394                             |       |             |       | 27,122           |       |
| Operating income                                              |       |                             |       | 17,362            |       | 4,496                       |       | 7,756                             |       | (7               | )          | 29,607           |       |
| Other, net                                                    |       | $                                | (4,800     | )                 | (5,646     | )                           | 29         |                              | (160       | )                |       |             | (10,577    | ) |
| Income (loss)  from continuing operations before income taxes |       | (4,800                           | )          | 11,716            |       | 4,525                       |       | 7,596                             |       | (7               | )          | 19,030           |       |
| Provision  (benefit) for income taxes                         |       | (714                             | )          | 1,389             |       | 241                         |       | 2,492                             |       |             |       | 3,408            |       |
| Income (loss)  from continuing operations                     |       | (4,086                           | )          | 10,327            |       | 4,284                       |       | 5,104                             |       | (7               | )          | 15,622           |       |
| Income (loss)  from discontinued operations                   |       |                             |       |              |       | 402                         |       |                              |       |             |       | 402              |       |
| Equity in  earnings of affiliated companies, net              |       | 20,110                           |       | 9,783             |       | 113                         |       |                              |       | (30,006          | )          |             |       |
| Net income                                                    |       | $                                | 16,024     |              | $          | 20,110                      |       | $                                 | 4,799      |             | $          | 5,104            |       | $ | (30,013 | ) | $ | 16,024 |   |

 
| **For the  Nine Months Ended September 30, 2005**             |   |    |    |    |    |   |   |    |   |     |    |    |    |
|---------------------------------------------------------------|--------|---------|---------|---------|---------|--------|--------|---------|--------|----------|---------|---------|---------|
| Sales                                                         |   |    |    | $       | 376,095 |   | $      | 89,495  |   | $        | 205,374 |    | $       | (145,652 | ) | $ | 525,312 |   |
| Cost of sales                                                 |   |    |    | 275,340 |    | 69,036 |   | 153,579 |   | (143,696 | )       | 354,259 |    |
| Gross profit                                                  |   |    |    | 100,755 |    | 20,459 |   | 51,795  |   | (1,956   | )       | 171,053 |    |
| Selling, general  and administrative expenses                 |   |    |    | 50,825  |    | 8,844  |   | 23,403  |   |     |    | 83,072  |    |
| Operating income                                              |   |    |    | 49,930  |    | 11,615 |   | 28,392  |   | (1,956   | )       | 87,981  |    |
| Other, net                                                    |   | $       | (13,266 | )       | (15,668 | )      | 29     |    | (397   | )        |    |    | (29,302 | ) |
| Income (loss)  from continuing operations before income taxes |   | (13,266 | )       | 34,262  |    | 11,644 |   | 27,995  |   | (1,956   | )       | 58,679  |    |
| Provision  (benefit) for income taxes                         |   | (2,136  | )       | 2,041   |    | 662    |   | 9,767   |   |     |    | 10,334  |    |
| Income (loss)  from continuing operations                     |   | (11,130 | )       | 32,221  |    | 10,982 |   | 18,228  |   | (1,956   | )       | 48,345  |    |
| Income (loss)  from discontinued operations                   |   |    |    |    |    | 2,081  |   |    |   |     |    | 2,081   |    |
| Equity in  earnings of affiliated companies, net              |   | 61,556  |    | 29,335  |    | 247    |   |    |   | (91,138  | )       |    |    |
| Net income                                                    |   | $       | 50,426  |    | $       | 61,556 |   | $       | 13,310 |     | $       | 18,228  |    | $ | (93,094 | ) | $ | 50,426 |   |

 

18

----

**Condensed Consolidating Balance Sheet Information**
| **(Amounts in thousands)**                       | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **September  30, 2006**                                    | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                 |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Cash and cash equivalents                                  |       |                             |       |              |       |                        |       | $                                 | 15,466     |             | $          | (3,672           | )          | $ | 11,794 |   |
| Accounts receivable, net                                   |       |                             |       | $                 | 58,553     |                        | $          | 10,779                            |       | 32,968           |       |             |       | 102,300 |   |
| Intercompany receivables                                   |       |                             |       | 129,025           |       | 105,520                     |       | 15,713                            |       | (250,258         | )          |             |       |
| Inventories                                                |       |                             |       | 47,910            |       | 18,978                      |       | 23,605                            |       | (5,924           | )          | 84,569           |       |
| Deferred income taxes                                      |       |                             |       | 19,249            |       |                        |       | 292                               |       |             |       | 19,541           |       |
| Other current assets                                       |       |                             |       | 2,508             |       | 56                          |       | 2,856                             |       |             |       | 5,420            |       |
| Total current assets                                       |       |                             |       | 257,245           |       | 135,333                     |       | 90,900                            |       | (259,854         | )          | 223,624          |       |
| Investments in  affiliated companies                       |       | $                                | 144,971    |              | 288,259    |                        | 617        |                              | 248        |             | (434,095   | )                |       |   |
| Property, plant  and equipment, net                        |       |                             |       | 35,761            |       | 15,321                      |       | 45,854                            |       |             |       | 96,936           |       |
| Assets held for  sale                                      |       |                             |       |              |       | 2,700                       |       |                              |       |             |       | 2,700            |       |
| Goodwill and  other assets                                 |       |                             |       | 66,434            |       | 35,195                      |       | 20,056                            |       | (3,900           | )          | 117,785          |       |
| Total Assets                                               |       | $                                | 144,971    |              | $          | 647,699                     |       | $                                 | 189,166    |             | $          | 157,058          |       | $ | (697,849 | ) | $ | 441,045 |   |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Current maturities of long-term debt                       |       |                             |       | $                 | 1,500      |                        |       |                              |       |             |       |             | $          | 1,500 |   |
| Accounts payable                                           |       |                             |       | 18,751            |       | $                           | 9,901      |                              | $          | 8,516            |       | $                | (3,672     | ) | 33,496 |   |
| Intercompany payables                                      |       | $                                | 250,258    |              |       |                        |       |                              |       |             | (250,258   | )                |       |   |
| Other current liabilities                                  |       |                             |       | 44,220            |       | 7,353                       |       | 15,775                            |       |             |       | 67,348           |       |
| Total current liabilities                                  |       | 250,258                          |       | 64,471            |       | 17,254                      |       | 24,291                            |       | (253,930         | )          | 102,344          |       |
| Long-term debt,  excluding current maturities              |       |                             |       | 375,750           |       |                        |       |                              |       |             |       | 375,750          |       |
| Other liabilities                                          |       | 1,365                            |       | 62,507            |       | 198                         |       | 7,334                             |       | (1,801           | )          | 69,603           |       |
| Total  liabilities                                         |       | 251,623                          |       | 502,728           |       | 17,452                      |       | 31,625                            |       | (255,731         | )          | 547,697          |       |
| Stockholders’  equity (deficit)                       |       | (106,652                         | )          | 144,971           |       | 171,714                     |       | 125,433                           |       | (442,118         | )          | (106,652         | )          |
| Total Liabilities and  Stockholders’ Equity (Deficit) |       | $                                | 144,971    |              | $          | 647,699                     |       | $                                 | 189,166    |             | $          | 157,058          |       | $ | (697,849 | ) | $ | 441,045 |   |

 

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  Nine Months Ended September 30, 2006**     | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by (used in) operating activities  |       | $                                | 6,347      |              | $          | (2,917                      | )          | $                                 | (1,274     | )                | $          | 12,830           |       | $ | (2,835 | ) | $ | 12,151 |   |
|                                                  | ** ** | ** **                       | ** ** |              |       |                        |       |                              |       | ** **       | ** ** |             |       |
| Purchase of  property, plant and equipment            | ** ** | ** **                       | ** ** | (8,055            | )          | (1,509                      | )          | (5,999                            | )          | ** **       | ** ** | (15,563          | )          |
| Discontinued  operations                              | ** ** | ** **                       | ** ** |              |       | 32,644                      |       |                              |       | ** **       | ** ** | 32,644           |       |
| Other                                                 | ** ** | ** **                       | ** ** | 43                |       | 1                           |       | (443                              | )          | ** **       | ** ** | (399             | )          |
|                                                  | ** ** | ** **                       | ** ** |              |       |                        |       |                              |       | ** **       | ** ** |             |       |
| Net cash  provided by (used in) investing activities  |       |                             |       | (8,012            | )          | 31,136                      |       | (6,442                            | )          |             |       | 16,682           |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net borrowings  under revolving credit facility       |       |                             |       | 53,000            |       |                        |       |                              |       |             |       | 53,000           |       |
| Repayment of  term loan principal                     |       |                             |       | (78,820           | )          |                        |       | (4,653                            | )          |             |       | (83,473          | )          |
| Advances from  (to) affiliates                        |       | (7,544                           | )          | 37,406            |       | (29,862                     | )          |                              |       |             |       |             |       |
| Other                                                 |       | 1,197                            |       | (700              | )          |                        |       |                              |       |             |       | 497              |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by (used in) financing activities  |       | (6,347                           | )          | 10,886            |       | (29,862                     | )          | (4,653                            | )          |             |       | (29,976          | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net decrease in  cash and cash equivalents            |       |                             |       | (43               | )          |                        |       | 1,735                             |       | (2,835           | )          | (1,143           | )          |
| 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          |             | $          | 15,466           |       | $ | (3,672 | ) | $ | 11,794 |   |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **For the  Nine Months Ended September 30, 2005**     | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by (used in) operating activities  |       | $                                | (10,315    | )                 | $          | 41,090                      |       | $                                 | 1,989      |             | $          | 2,536            |       | $ | 316 |   | $ | 35,616 |   |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Purchase of  property, plant and equipment            |       |                             |       | (3,928            | )          | (1,396                      | )          | (8,228                            | )          |             |       | (13,552          | )          |
| Other                                                 |       |                             |       | 910               |       | (593                        | )          | 22                                |       |             |       | 339              |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash used in  investing activities                |       |                             |       | (3,018            | )          | (1,989                      | )          | (8,206                            | )          |             |       | (13,213          | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Repayment of  term loan principal                     |       |                             |       | (47,583           | )          |                        |       | (209                              | )          |             |       | (47,792          | )          |
| Other                                                 |       | 10,315                           |       | (7,718            | )          |                        |       |                              |       |             |       | 2,597            |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by (used in) financing activities  |       | 10,315                           |       | (55,301           | )          |                        |       | (209                              | )          |             |       | (45,195          | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       |                             |       | (17,229           | )          |                        |       | (5,879                            | )          | 316              |       | (22,792          | )          |
| Cash and cash  equivalents at beginning of period     |       |                             |       | 17,229            |       |                        |       | 33,801                            |       | (2,460           | )          | 48,570           |       |
| Cash and cash  equivalents at end of period           |       | $                                | 0          |              | $          | 0                           |       | $                                 | 0          |             | $          | 27,922           |       | $ | (2,144 | ) | $ | 25,778 |   |

 

**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”(“FIN No. 48”). This interpretation clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB Statement No. 109, “Accounting for Income Taxes.”  FIN No. 48 prescribes a recognition thresholdand 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 FIN No. 48 on its financialstatements and will adopt the interpretation effective January 1, 2007.

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishesa framework for measuring fair value in accordance with accounting principlesgenerally accepted in the U.S., and expands disclosures about fair valuemeasurements.  The provisions of SFAS No. 157 are effective for theCompany’s fiscal year beginning January 1, 2008.  The Company is currentlyevaluating the impact of the provisions of SFAS No. 157.

In September 2006, FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans” (“SFAS No. 158”).  SFAS No. 158

21

----

requires an employer to recognize the over-funded orunder-funded status of a defined benefit postretirement plan (other than amultiemployer plan) as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income. This Statement also requires an employer to measure the funded status ofa plan as of the date of its year-end statement of financial position, withlimited exceptions.  The Company iscurrently evaluating the impact of SFAS No. 158 on its financial statements andwill adopt the statement effective December 31, 2006.

In September 2006, theSEC issued Staff Accounting Bulletin No. 108 “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (“SAB 108”). SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment.  TheCompany adopted SAB 108 in September 2006 with no affect on the financialstatements.

**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 nine months ended September 30,2006 (unaudited) compared to three months and nine months ended September 30,2005 (unaudited).**
| ** **                                                                      | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                            | ** ** | ** **                                           | ** ** | ** **                                          |       |   |   |   |   |
| Sales                                                                           |       | $                                                    | 164,097    |                                                | $          | 175,182 |   | $ | 492,993 |   | $ | 525,312 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Operating income                                                                |       | 18,657                                               |       | 29,607                                              |       | 64,956 |   | 87,981 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Income from  continuing operations                                              |       | 10,134                                               |       | 15,622                                              |       | 28,867 |   | 48,345 |   |
| Income from  continuing operations per diluted share                            |       | 0.21                                                 |       | 0.33                                                |       | 0.60 |   | 1.02 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Income from  discontinued operations                                            |       | 4,990                                                |       | 402                                                 |       | 4,641 |   | 2,081 |   |
| Income from  discontinued operations per diluted share                          |       | 0.11                                                 |       | 0.01                                                |       | 0.10 |   | 0.04 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                      |       | 15,124                                               |       | 16,024                                              |       | 33,508 |   | 50,426 |   |
| Net income per diluted  share                                                   |       | 0.32                                                 |       | 0.34                                                |       | 0.70 |   | 1.06 |   |
|                                                                                 |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

These results reflect the following:

·                  On July 27, 2006 we completed the sale of certain assets andliabilities of our Dixon Industries, Inc. (“Dixon”) subsidiary to HusqvarnaProfessional Outdoor Products, Inc. (“Husqvarna”).  Dixon comprised our entire Lawnmower segmentwhich is reported as discontinued operations for all periods presented, and isnot included in our discussion of results from continuing operations.

·                  On August 4, 2006, we amended our U.S. retirement plans,freezing our defined benefit and supplemental retirement benefit planseffective December 31, 2006 and increasing the expected contributions we willmake under our defined contribution plan. These changes resulted in a pre-tax charge to income from continuingoperations of $3.7 million in the three and nine month periods of 2006.

·                  On August 8, 2006, we announced our plan to close one of oursmaller manufacturing plants, located in Menominee, Michigan, and shiftproduction of the affected products to our other plants within our Industrial

22

----

and Power Equipment segment during the fourth quarter of2006. This plant closure resulted in a pre-tax charge of $1.1 million in thethree and nine month periods.

·                  In the three months ended September 30, 2006, we recognized anet income tax benefit on continuing operations of $0.6 million, resulting fromthe year-to-date effects of implemented tax planning initiatives with higheranticipated deductions and exclusions on our domestic income tax return.

Sales in the three and nine months ended September 30, 2006decreased by $11.1 million, or 6%, and $32.3 million, or 6%, respectively, fromthe same periods in 2005.  Thesedecreases are largely due to decreases in sales volume, amounting to $10.5million and $34.2 million, respectively. For the three month period, the combination of selling price and mixresulted in a decrease of $2.0 million in sales, partially offset by a $1.4million increase due to the change in foreign currency translation rates fromlast year.  For the nine month period,selling price and mix had a favorable effect resulting in $2.9 million ofadditional sales, partially offset by the unfavorable effect of foreigncurrency translation estimated to be $1.0 million.  Highlights of the year over year comparisonof sales include the following:

·                  For the Outdoor Products segment, sales were up slightlycompared to last year with increases of $2.6 million, or 2%, for the threemonth period, and $0.7 million for the nine month period.  The year over year change in foreign currencyexchange rates had a positive effect on sales of $1.4 million during the threemonth period and a negative effect on sales of $1.0 million for the nine monthperiod as compared to last year.

·                  In the Industrial and Power Equipment segment, salesdecreased by $13.9 million, or 21%, during the three month period, and $33.1million, or 18%, for the nine month period. These decreases were primarily the result of a unit volume decline fortimber harvesting equipment.  Weakermarket conditions were the primary factor contributing to the decline involume.

·                  International sales, on a consolidated basis, increased by 9%from last year’s three month period and declined 2% for the nine monthperiod.  Domestic sales decreased by 18%for the three month period and 10% for the nine month period compared to thesame periods of 2005.

Consolidated order backlog at September 30, 2006 was $93.5million, a decrease from $112.6 million at June 30, 2006, and $127.5 million atDecember 31, 2005.

Operating income decreased by $11.0 million to $18.7 millionduring the three month period and by $23.0 million to $65.0 million during thenine month period compared to the same periods in 2005.  For the three month period, the operatingmargin was 11.4% compared to 16.9% last year, and for the nine month period,the operating margin was 13.2% compared to 16.7% in the same period lastyear.  The decrease in operating incomeincludes a year over year reduction in gross profit of $7.5 million, or 13%,for the three month period, and a reduction of $18.0 million, or 11%, for thenine month period.  As a percent ofsales, gross margin decreased to 30.0% and 31.0%, respectively, for the threeand nine months ended September 30, 2006 compared to 32.4% and 32.6% for thesame periods in 2005.  Selling, generaland administrative (SG&A) expense decreased by $1.4 million, or 5%, duringthe three month period, but for the nine month period was comparable,increasing by $0.2 million compared to the prior year period.  The current year results also include non-recurringcharges of $3.7 million related to the freeze of our domestic defined benefitpension plan, and $1.1 million related to the closure of a manufacturingfacility in our Industrial and Power Equipment segment.

The year over year change in consolidated gross profit ispresented in the following table: 
| **(Amounts in millions)** | ** ** | **Three months  Ended September 30** | ** ** | **Nine months  Ended September 30** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| 2005 gross  profit                  |       | $                                                   | 56.7       |                                               | $          | 171.1 |   |
| Increase (decrease)                 |       |                                                |       |                                               |       |
| Sales volume                        |       | (1.4                                                | )          | (7.1                                               | )          |
| Selling price and mix               |       | (2.0                                                | )          | 2.8                                                |       |
| Product cost and mix                |       | (3.8                                                | )          | (8.3                                               | )          |
| Foreign currency translation        |       | (0.3                                                | )          | (5.5                                               | )          |
| 2006 gross profit                   |       | $                                                   | 49.2       |                                               | $          | 153.0 |   |

 

23

----

The decrease attributed to sales volume was primarily due toa decrease in unit sales of timber harvesting equipment in our Industrial andPower Equipment segment.  The decrease inselling price and mix in the three months was primarily due to lower averageselling prices in the Outdoor Products segment, largely related to relativesales volumes by distribution channel. On a nine month basis, selling price and mix contributed to an increaseof $2.8 million due to price increases instituted earlier in 2006.  The decrease in gross margin related toproduct mix and cost included the effects of inflation on value added inputssuch as labor and utilities, and a reduction in efficiency within both segmentsdue to reductions in production volumes as compared to last year.  These increases were partially offset bylower steel costs as compared to last year for the nine month period ofapproximately $1.2 million.  For thethree month period, steel costs did not significantly change from lastyear.  During the three month period thenet negative impact of foreign currency translation reflects strongercurrencies in Europe, Canada and Brazil, relative to the U.S. dollar, ascompared to last year.  For the ninemonth period the negative effect of foreign currency translation has been moresignificant, due to weaker European currencies relative to the U.S. dollar andstronger currencies in Canada and Brazil as compared to last year.

SG&Adecreased to $25.7 million in the third quarter of 2006 from $27.1 million inthe same period of 2005, and increased for the nine month period to $83.3million, compared to $83.1 million last year. As a percent of sales, SG&A increased to 15.7% and 16.9%,respectively, for the three and nine month periods compared to 15.5% and 15.8%,respectively, for these same periods in 2005. The three month year over year decrease of $1.4 million, or 5%, includedlower expenses of $2.3 million for wages and benefits, primarily due to reducedbenefits expense and performance based compensation.  These decreases were partially offset byincreases of $0.7 million for stock-based compensation expense related to theadoption of a new accounting standard and $0.4 million for the unfavorableeffect of currency exchange rates on expenses at our foreign offices.  For the nine months ended September 30, 2006,expenses were $0.2 million higher than last year, including, $2.9 million forstock-based compensation expense and a $1.1 million increase in engineeringmaterials and professional services related to new product upgrades.  These increases were partially offset bydecreases that included a $1.4 million reduction in wages and benefits, and a$1.5 million reduction for legal and compliance-related professional services.

InAugust 2006, we announced a redesign of our domestic retirement plans,including a freeze of our domestic defined benefit pension plan as of December31, 2006, and an increase in funding under our defined contribution 401(k) plan. In conjunction with this redesign, we incurred a pension curtailmentcharge of $3.2 million in the three months ended September 30, 2006,representing the unamortized prior service cost for plan participants, and anadditional charge of $0.5 million for related fees and costs associated withthe changes to our retirement plans.

OnAugust 8, 2006, we announced our plan to close one of our manufacturing plants,located in Menominee, Michigan, and shift production of the affected productsto the other plants within our Industrial and Power Equipment segment duringthe fourth quarter of 2006.  Werecognized a $1.1 million charge related to this plant closure during the threeand nine months ended September 30, 2006, and anticipate additional charges of$0.3 to $0.5 million will be incurred in the fourth quarter of 2006.  The related land and building is currentlybeing marketed for sale.

Interestexpense was $8.9 million and $27.2 million, respectively, during the three andnine months ended September 30, 2006.  The decreases from the prior year’s comparable periods of $0.4 millionfor the three month period and $0.8 million for the nine month period werelargely due to the lower average outstanding debt balances, partially offset byan increase in average interest rates on our variable rate debt.  Interest income was comparable for the threemonth period and decreased by $0.3 million for the nine month period comparedto last year.  The decrease in interestincome compared to last year was primarily due to a decline in average cashbalances.

Otherexpense for the three month period was $0.3 million; $1.0 million lower thanlast year’s results which included $1.3 million in charges to write offdeferred financing costs resulting from the pre-payment of debt principal.  For the nine month period, other income of$0.8 compared to other expense of $1.8 million for the same period in2005.  Included in the current yearresults is a net gain on an insurance settlement.  Last year’s results included a $1.7 millioncharge recorded to write off deferred financing costs from pre-payment of debtprincipal.

The2006 provision for income taxes was a benefit of $0.6 million in the threemonth period, and an expense of $9.9 million in the nine month period, with ayear-to-date effective tax rate of 25.5%. In 2005 the income tax provision was $3.4 million in the three monthperiod, or 17.9% of income before income taxes, and $10.3 million for the nine

24

----

monthperiod, or 17.6% of income before taxes. This year’s tax provision for the three and nine month periods reflectsthe year-to-date effects of implemented tax planning initiatives with higheranticipated deductions and exclusions. Last year’s tax rate reflects the application of a full valuationallowance on domestic tax assets and was based upon a management determinationconcerning 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 provisions for both comparable periodsincluded very little domestic federal tax expense, whereas the 2006 income taxprovisions include a full domestic federal tax expense component. During 2006,we have continued to utilize available tax loss and credit carryforwards tooffset cash taxes payable.  We estimatethe remaining federal net operating loss carryforward as of September 30, 2006is approximately $26.4 million.

Asmentioned above, for all periods presented, discontinued operations consistedentirely of our Lawnmower segment.  Thegain from discontinued operations was $5.0 million ($0.11 per diluted share)for the three months and $4.6 million ($0.10 per diluted share) for the ninemonths ended September 30, 2006 compared to net income from discontinuedoperations of $0.4 million ($0.01 per diluted share) and $2.1 million ($0.04per diluted share) for the same periods in 2005.

TheCompany operated the Lawnmower segment through July 26, 2006.  The three month period of 2006 therefore onlyincludes sales of $3.0 million, compared to $11.5 million during the completethree month period of 2005.  For the ninemonth period, sales of $29.5 million compare to sales for the nine months endedSeptember 30, 2005 of $40.4 million.  Forthe three and nine months ended September 30, pre-tax income of $12.8 millionand $12.2 million, respectively, includes a $17.7 million pre-tax gain on thedisposal of net assets.  The net gain ondisposal included $33.9 million of cash proceeds, partially offset by the $15.1million book value of net assets sold and $1.1 million of estimated transactioncosts.

Excludingthe gain on sale of net assets, the pre-tax loss from operations of thediscontinued Lawnmower segment was $4.9 million for the three month period and$5.5 million for the nine month period of 2006. These losses are primarily the result of expenses necessary to finalizethe closure of the facility, including the termination of the majority of thelawnmower segment employees, and to facilitate the transfer of assets sold toHusqvarna.  These results includecompensation, severance and benefits costs of $1.2 during the three months and$3.1 million for the nine months; a charge during the three month period towrite down assets retained by the Company (primarily the land and building);and other expenses.  Income taxes fordiscontinued operations were $7.8 million and $7.6 million, respectively, forthe three and nine month periods in 2006.

***Segment Results.*******
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Sales:**                           |       |                                                 |       |                                                |       |   |   |   |   |
| Outdoor Products                     |       | $                                                    | 111,481    |                                                | $          | 108,855 |   | $ | 340,400 |   | $ | 339,748 |   |
| Industrial and  Power Equipment      |       | 52,747                                               |       | 66,659                                              |       | 153,226 |   | 186,362 |   |
| Inter-Segment  elimination           |       | (131                                                 | )          | (332                                                | )          | (633 | ) | (798 | ) |
| Total sales                          |       | $                                                    | 164,097    |                                                | $          | 175,182 |   | $ | 492,993 |   | $ | 525,312 |   |
|                                 |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating  income:**               |       |                                                 |       |                                                |       |   |   |   |   |
| Outdoor Products                     |       | $                                                    | 23,532     |                                                | $          | 25,244 |   | $ | 71,437 |   | $ | 80,527 |   |
| Industrial and  Power Equipment      |       | 3,949                                                |       | 8,187                                               |       | 11,980 |   | 19,373 |   |
| Inter-Segment  elimination           |       | 56                                                   |       | 10                                                  |       | 29 |   | (20 | ) |
| Contribution  from segments          |       | 27,537                                               |       | 33,441                                              |       | 83,446 |   | 99,880 |   |
| Corporate  expenses                  |       | (4,078                                               | )          | (3,834                                              | )          | (13,688 | ) | (11,899 | ) |
| Retirement plan  redesign            |       | (3,747                                               | )          | —                                              |       | (3,747 | ) | — |   |
| Plant closure  costs                 |       | (1,055                                               | )          | —                                              |       | (1,055 | ) | — |   |
| Operating income                     |       | $                                                    | 18,657     |                                                | $          | 29,607 |   | $ | 64,956 |   | $ | 87,981 |   |

 

25

----

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment in the three monthperiod of 2006 increased $2.6 million, or 2%, compared to the same period of2005.  For the nine month period, saleswere up slightly year over year, increasing $0.7 million.

The effect of volume on the three month period was anincrease in sales of $3.8 million, partially offset by a $2.6 million decreasein average selling prices due to product and customer mix.  For the nine month period, the higher volumecontributed $1.0 million of additional sales, along with the favorable effectof higher average selling prices and mix of $0.7 million. The year over year effectfrom foreign currency translation on sales, which was due primarily to exchangerates involving the euro and other European currencies, was $1.4 millionfavorable for the three month period, and $1.0 million unfavorable for the ninemonth period.  Geographically, sales grewoutside the United States by 9% for the three month period but declined 1% forthe nine month period compared to 2005. This increase in international sales was partially offset by a 7% declinein domestic sales compared to last year’s three month results, with nine monthdomestic sales increasing 2% year over year. Sales of yard care parts and accessories decreased 22% for the threemonth period and 3% for the nine month period as compared to last year.  Sales of these products are weighted towardour U.S. markets and have been influenced by unfavorable weather patternsduring the third quarter of 2006.  Salesof concrete cutting products increased by 16% during the three month period andby 7% during the nine month period compared to last year.  Order backlog declined to $64.8 millioncompared to $75.7 million at June 30, 2006 and $82.5 million at December 31,2005.  The decrease in backlog comparedto last year is partially due to increases in capacity and improved delivery tocustomers that have resulted in reduced order lead-time.

Three month segment contribution to operating incomedecreased $1.7 million and was 21.1% of sales compared to 23.2% of sales lastyear.  Segment contribution to operatingincome for the nine months declined $9.1 million and was 21.0% of salescompared to 23.7% of sales last year.  Inthe three and nine month comparisons to last year’s results, foreign currencyexchange rates had an unfavorable net effect of $0.7 million and $5.6 million,respectively.  Throughout 2006, the U.S.dollar has been weaker than in 2005 against currencies in countries outside theU.S. where we have a manufacturing presence. During the third quarter, this was largely offset by the U.S. dollarbeing weaker than in 2005 in markets where we have significant sales; however,for the nine months, the U.S. dollar was, on average, stronger in these marketsand contributed to a larger decrease in operating income.  Sales volume increases generated $2.1 millionand $1.1 million more operating income, respectively, for the three and ninemonths as compared to last year.  Thecombined net unfavorable effect of selling prices, product costs, mix andSG&A expense was $3.1 million for the quarter and $4.5 million for the ninemonths compared to the same periods last year. Included in these results were comparable steel costs for the threemonth period, and a decrease in steel costs estimated at $1.5 million for thenine month period.  Employee wages andbenefits decreased by $1.3 during the three months and by $0.5 million for thenine months, compared to last year. These decreases, however, along with selling price increases implementedearlier in the year in certain of our markets, were offset by the unfavorableshift in mix among products and distribution channels, and other increases inour costs of production due to decreased efficiency related to lower volumes ofmanufactured products.

***Industrial and Power Equipment Segment.***** **Sales for the Industrial and Power Equipment segmentdecreased $13.9 million, or 21%, in the three month period of 2006 compared tothe same period of 2005.  For the ninemonth period, sales decreased $33.1 million, or 18%, compared to the sameperiod of 2005.

The year over year sales decline was caused by lower unit salesof our timber harvesting equipment, estimated to be $15.6 million and $40.0million, respectively, for the three and nine month periods.  The volume decrease occurred across ourproduct lines and brands in North America reflecting softer market conditionscompared to the prior year. The decrease in volume for our timber harvestingequipment was partially offset by an increase in volume for our rotationalbearings and swing drive products, with total sales in these component lines up12% for the three months and 28% for the nine months, each compared to lastyear. The growth for these product lines was primarily due to increased unitvolumes, which have been supported by improvements in manufacturing processesthat generated better product flow and improved customer service.

Improvedprice realization and mix generated additional segment sales of $0.6 millionand $2.2 million, respectively, for the three and nine month periods.  Geographically, segment sales declined 25%domestically during the third quarter. Outside the U.S., sales in Canada were also down, but this decrease wasoffset by growth in other

26

----

regions that more than doubled last year’s three monthcomparable period.  For the nine monthperiod, sales decreased by 19% domestically and 13% outside the U.S.  Order backlog for the segment was $28.7million at September 30, 2006 compared to $37.0 million at June 30, 2006 and$45.0 million at December 31, 2005.

Demand for our timber harvesting equipment was weakest inCanada and the upper Midwestern part of the U.S. due to weather-relatedfactors, and Canadian sales have also been negatively impacted by unfavorablemovement in exchange rates as the Canadian dollar has strengthened in relationto the U.S. dollar.  Market demand fortimber harvesting equipment in North America has further declined in recentmonths with the actual and forecasted decline in new housing starts, as well asslowing demand for wood products.

In August we announced the closure of the segment’s smallestmanufacturing plant in Menominee, Michigan. Manufacturing of affected products will be moved to other plants duringthe fourth quarter.  In June 2006, weacquired 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.  In February 2006, our agreements withCaterpillar, Inc. were amended and products offered under the Timberking brandwere converted to the “Caterpillar®” or “CAT®” brand.  This brandconversion is part of a long term strategy to increase our product offeringsand the distribution network where our products are sold. We also recentlyannounced an initiative to consolidate three of the Company’s brand offerings(Hydro-Ax, Prentice and Fabtek) to one (Prentice). This brand transition wascomplemented with 17 new designs that were introduced to customers in August.

Three month segment contribution to operating income decreased$4.2 million, and was 7.5% of sales compared to 12.3% of sales last year.  Segment contribution during the nine monthsended September 30, 2006 decreased $7.4 million, and was 7.8% of sales comparedto 10.4% during the same period in 2005. The year over year decrease includes the unfavorable effect from lowervolume of $3.5 million for the three months and $8.2 million for the ninemonths.  Steel prices had a minimaleffect on results during the three month period compared to the same periodlast year but for the nine month period resulted in higher costs ofapproximately $0.3 million.  The neteffect of higher selling prices, product mix and other product costs resultedin reduced contribution of $1.5 million during the three month period and anincrease of $1.5 million for the nine month period.  Product development costs, related toEPA-mandated Tier III engines and other product design projects, increased by$0.2 million for the three months and $1.1 million for the nine months comparedto the prior year.  The brand conversionof Caterpillar products resulted in incremental expense of $0.8 million for thenine months ended September 30, 2006 compared to last year, while theconsolidation among Blount brands resulted in minimal incremental cost.  These cost increases were partially offset byyear over year decreases in expense for performance based compensation,benefits and travel for a combined savings of $0.9 million during the threemonth period and $0.9 million for the nine month period ended September 30,2006.

***Corporate Expense.***  Corporate expense increased by $0.2 million,or 6%, during the three months ended September 30, 2006 as compared to 2005.Included in this increase is $0.7 million related to stock-based compensationexpense following the adoption of a new accounting standard, Statement ofFinancial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No.123(R)”) at the beginning of 2006.  Thisincrease was partially offset by decreases of $0.3 million in legal and otherprofessional services and $0.3 million for employee benefits expenses.   For the nine month period, corporate expenseincreased $1.8 million, or 15%, compared to the same period last year andincluded stock-based compensation related to SFAS No. 123(R) of $2.9 million.  SFAS No. 123(R) requires the recognition ofexpense for stock related grants made to retirement-eligible employees berecorded at the time of grant.  In thefirst quarter of 2006, the Company granted stock-based compensation to certainretirement-eligible employees and, as a result, the stock-based compensationexpense recorded during the first quarter was higher than in subsequentquarters and, similarly, higher than the expense expected in the remainder ofthe year.  The total expected stock-basedcompensation expense for 2006 is estimated to be $3.1 million.  In the nine month period, legal and otherprofessional service expenses were $1.0 million lower than in 2005 and employeebenefits expenses were $0.6 million lower than last year.

27

----

**Financial Condition, Liquidity and CapitalResources**

As a result of the sale of Dixon and the closing of ourMenominee facility, certain assets have been reported separately as assets heldfor sale in our presentation of financial position as of September 30, 2006.

Totaldebt at September 30, 2006 was $377.3 million compared to $407.7 million atDecember 31, 2005.  As of September 30,2006, outstanding debt consisted of a revolving credit facility balance of$53.0 million, a term B loan of $149.3 million and 8 7/8% senior subordinatednotes of $175.0 million.  The decrease indebt outstanding in the nine month period was primarily from the application ofnet cash proceeds generated by the sale of our Lawnmower segment.

Interestexpense was $27.2 million in the first nine months of 2006, a decrease of $0.8million compared to the first nine months of 2005.  The comparison included the favorable effectfrom a reduction in the average principal amount of debt outstanding, but was partiallyoffset by higher variable interest rates for the two comparable periods.  Our interest expense may vary in the futurebecause the revolving credit facility and term B loan interest rates arevariable. The interest rate is fixed on the senior subordinated notes.  Interest rates have risen throughout 2005 andthe first nine months of 2006, although we reduced our variable interest rateswith an amendment to our credit facilities in March 2006.  Our weighted average interest rate on alldebt was 7.97% as of September 30, 2006, compared to 7.63% as of December 31,2005.  Cash paid for interest in thefirst nine months of 2006 was $29.3 million compared to $25.7 million in thesame period of 2005, an increase due to the difference in timing of term loan interestpayments.

***2006 Amendment to Credit Facilities.***  On March 23, 2006, we amended certain termsof our senior credit facilities.  Thisamendment included the following changes to the term notes and revolving creditfacility:

·                  Maximum availability under the revolving credit facility wasincreased from $100.0 million to $150.0 million.

·                  Interest rates were reduced by 0.75% for the term B loan and1.00% for the revolving credit facility.

·                  Certain financial covenants were modified, includingincreases to the amounts that may be expended for acquisitions, dividends andpurchase of Company stock, as well as modifications to certain financial ratiorequirements.

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

Immediately following theamendment, we completed the following transactions:

·                  $82.1 million was borrowed under the revolving creditfacility.

·                  The total principal balance of $4.6 million was paid off onthe Canadian term loan, and that loan was cancelled.

·                  $77.5 million in principal was paid against the 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 ofSeptember 30, 2006, we had the ability to borrow an additional $91.1 millionunder the terms of the revolving credit agreement.  The revolving credit facility bears interestat the LIBOR rate plus 1.75%, or at the prime rate, depending on the type ofloan, and matures on August 9, 2009. Interest is payable monthly in arrears on any prime rate borrowings andat the individual maturity dates for any LIBOR-based term borrowings.  Any outstanding principal is due in itsentirety 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.

28

----

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 September 30, 2006.

Ourdebt continues to be significant, and future debt service payments continue torepresent substantial obligations.  Thisdegree of leverage may adversely affect our operations and could have importantadverse consequences.

Weintend to fund working capital, capital expenditures and debt servicerequirements for the next twelve months through expected cash flows generatedfrom operations.  We expect our remainingresources will be sufficient to cover any additional increases in workingcapital and capital expenditures for at least the next twelve months.  There can be no assurance, however, thatthese resources will be sufficient to meet our needs.  We may also consider other options availableto us in connection with future liquidity needs.

Cashand cash equivalents at September 30, 2006 were $11.8 million compared to $12.9million at December 31, 2005.  The $1.1million decrease in our cash balance during the first nine months of 2006compares to a decrease of $22.8 million in the same period of 2005.

Cashused in operating activities is summarized in the following table:
| ** **                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**    | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Income from  continuing operations      |       | $                                                       | 28,867     |   | $ | 48,345 |   |
| Non-cash items                          |       | 25,601                                                  |       | 15,396 |   |
| Subtotal                                |       | 54,468                                                  |       | 63,741 |   |
| Changes in assets  and liabilities, net |       | (38,649                                                 | )          | (27,065 | ) |
| Discontinued  operations                |       | (3,668                                                  | )          | (1,060 | ) |
| Cash provided by  operating activities  |       | $                                                       | 12,151     |   | $ | 35,616 |   |

 

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

Cashprovided by operating activities during the nine months ended September 30,2006 of $12.2 million included the following:

·                  Net income from continuing operations of $28.9 milliondecreased $19.5 million from the prior year due to the lower operating incomethat resulted 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 depreciation of $12.7 million,an increase of $1.4 million compared to the same period in 2005.  Non-cash adjustments also includeamortization, stock compensation and other non-cash charges, including $2.9 millionrelated to the adoption of SFAS 123(R) and $3.2 million of non-recurringpension curtailment charges.  Inaddition, non-cash adjustments include $4.0 million of deferred tax expenserelated to our utilization of net operating losses to satisfy what wouldotherwise have become cash tax liabilities on domestic earnings and $0.6million of net loss related to property, plant and equipment. These amounts arepartially offset by $0.5 million of excess tax benefits from share-basedcompensation.

29

----

·                  Changes in assets and liabilities, net,resulted in the use of $38.6 million of net cash in the nine months andincluded the following items:

·                  A $10.8 million increase in receivables.

·                  A $5.3 million increase in inventories.

·                  A combined decrease in accounts payable andaccrued expenses of $13.7 million, reflecting a decrease in the purchase of rawmaterials and other inventory.

·                  A decrease in other liabilities of $8.8million, primarily due to contributions made towards our funded pension plans.

·                  Discontinued operations used $3.7 millionin cash.

Cashprovided from operating activities during the nine months ended September 30, 2005of $35.6 million included the following:

·                  Net income from continuing operations of $48.3 million.

·                  Non-cash adjustments of $15.4 million for depreciation,amortization and other non-cash charges, including the write-off of deferredfinancing costs from early payment of debt principal, offset partially by again on disposal of property, plant and equipment.

·                  Changes in assets and liabilities, net, resulted in the useof $27.1 million in net cash and included the following items.

·                  A $14.8 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.

·                  A $10.5 million increase in inventoriesacross our two segments, primarily due to business growth.

·                  A decrease in accrued expenses of $3.6million, including a reduction in accruals for performance-based compensationrelated to 2004 that was paid during the first quarter of 2005, offset bycertain increases related to business growth, and a decrease in the current portionof post-retirement benefits.

·                  An increase in other liabilities of $3.4million, including an increase in the non-current post-retirement benefitobligation.

·                  Discontinued operations used $1.1 million in cash.

Accountsreceivable increased by $10.8 million during the first nine months of 2006compared to the end of 2005, after adjusting for $2.1 million from the effectof our discontinued Lawnmower segment and other non-cash items.  The increase in receivables is primarily dueto the timing of sales and collections in September 2006 compared to December2005.  The allowance for doubtfulaccounts was $2.1 million at September 30, 2006 and $2.2 million at December31, 2005.

Cashtaxes paid during the first nine months of 2006 were $6.9 million compared to$9.6 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 an above average amount paid duringthe first half of 2005 related to the previous year.  Otherwise, we expect cash taxes on continuingoperations 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.

Netcash provided from investing activities in the first nine months of 2006 was$16.7 million compared to net cash used of $13.2 million for the same period in2005.  The 2006 activity included thefollowing:

·                  Cash provided from discontinued operations was $32.6million.  On July 27, 2006, we soldcertain assets and liabilities of Dixon to Husqvarna.  Blount received preliminary proceeds of $33.9million upon the closing of the transaction, which were used to reduce debt,fund the closure of Dixon’s Coffeyville, Kansas facility and pay transitioncosts and transaction fees.  The proceedsreceived are subject to certain post-closing adjustments under the terms of therelated asset purchase agreement.

30

----

·                  Purchases of property, plant and equipment for our continuingoperations of $15.6 million.  Thisincludes $4.8 million invested at our new manufacturing facility in China,primarily for the installation of equipment to ramp up production capacity.

·                  During the third quarter, we also had expenditures of $0.5 toacquire the assets of Votec.

The2005 activity included the following:

·                  Purchases of property, plant and equipment for our continuingoperations of $13.6 million.  Thisincluded $3.1 million invested at our start-up China facility for theacquisition and installation of equipment.

·                  Net proceeds of $0.9 million from the sale of a surplusmanufacturing facility and warehouse at our Zebulon, North Carolina location.

·                  A usage of cash in discontinued operations of $0.6 million,primarily for the purchase of property, plant and equipment related to theLawnmower segment.

During2006, we expect to utilize approximately $23.0 million to $24.0 million inavailable cash for capital expenditures, much of it directed toward increasingour manufacturing capacity and efficiency in the Outdoor Products segment.

Cashused for financing activities in the first nine months of 2006 was $30.0million compared to $45.2 million in the comparable period of 2005.  The 2006 activity included the followingtransactions:

·                  Borrowing of $82.1 million on our revolving credit facilityto fund the reduction of term loan debt as part of the amendment to our seniorcredit facilities that occurred in March 2006, partially offset by a net $29.1million in repayments, primarily the result of the application of proceeds fromthe sale of our Lawnmower segment.

·                  Payments of $83.5 million of principal on our term loan debt,which included $1.3 million of scheduled payments and $82.1 million related tothe March 2006 amendment of our senior credit facilities.

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

·                  Exercise of stock options that generated $1.2 million,including $0.7 million of proceeds from the exercise of stock options, and arelated $0.5 million of tax benefit from these exercises that is recognized asa financing activity under SFAS No. 123(R).

The2005 activity included the following:

·                  Debt reduction of $47.8 million, including $45.0 million ofvoluntary pre-payments of principal and $2.8 million of scheduled and requiredpayments on our term loans;

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

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

·                  Proceeds from the exercise of stock options of $6.6 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 of our common stock,and its ownership as of September 30, 2005 was approximately 8.9 millionshares, or 19% of our outstanding common stock. We did not receive any proceeds from this secondary sale;

·                  We issued 382,380 shares of common stock and received netproceeds of $6.1 million;

·                  We purchased 382,380 shares of common stock from certainstockholders for $6.1 million.  Theseshares are held as treasury stock and we have accounted for this treasury stockas constructively retired in the consolidated financial statements; and

·                  Warrants for 1,000,000 shares of common stock at $0.01 pershare were exercised with net proceeds of $10 thousand received by Blount.

31

----

Of the amounts disbursed for debt and equity issuance costsin the first nine 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 SFAS No. 123(R) which requiresall share-based payments to employees, directors and others who provideservices to the Company, including grants of stock options, stock appreciationrights (“SARs”) and restricted stock, to be valued at fair value on the date ofgrant, and to be expensed over the applicable service period.  Prior to the adoption of this new standard,our policy was to account for stock-based compensation under AccountingPrinciples Board Opinion No. 25, using the intrinsic value method for stockoptions, and to provide pro forma disclosure of the income statement effects ofshare-based payments using fair value 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 nine months ended September 30, 2006, stockcompensation expense was $0.7 million and $2.9 million, respectively, net ofthe tax effect.  This compares to proforma expense of $0.2 million and $0.6 million, respectively, net of tax, forthe same periods in 2005.  At September30, 2006, there was $2.3 million of total compensation cost for awards that hasnot yet been recognized, with the weighted average period over which it isexpected to be recognized at 1.1 years.

Undercertain conditions, stock options, SARs and restricted stock granted by theCompany are eligible for continued vesting upon the retirement of the employee.SFAS No. 123(R) clarifies that the fair value of such stock-basedcompensation should be expensed based on an accelerated service period, orimmediately, rather than ratably over the vesting period stated in the grant,for employees who are retirement-eligible prior to the completion of thevesting period. The amount ofaccelerated amortization of expense recognized for those employees that wereretirement eligible or became retirement eligible within the vesting periodduring the three months and nine months ended September 30, 2006 was anincrease of $0.1 million and an increase of $1.1 million, respectively.

With the adoption SFAS No. 123(R), there was no materialdifference in valuation methodologies or assumptions used to estimate fairvalue compared to our previous pro forma disclosure.  Furthermore, there have been no modificationsto outstanding options during the period this standard was adopted or anychanges in the terms or conditions of outstanding stock awards.  New awards were granted during the firstquarter of 2006, in the form of stock-settled SARs, with comparable quantitiesgranted as in previous grants, and in the third quarter a grant of restrictedstock was made.

**RecentAccounting Pronouncements**

In June 2006, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN No. 48”). This interpretation clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB Statement No. 109, “Accounting for Income Taxes.”  FIN No. 48 prescribes a recognition thresholdand 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.  Weare currently evaluating the impact of FIN No. 48 on our financial statementsand will adopt the interpretation effective January 1, 2007.

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishesa framework for measuring fair value in accordance with accounting principlesgenerally accepted in the U.S., and expands disclosures about fair valuemeasurements.  The provisions of SFAS No. 157 are effective for theCompany’s fiscal year beginning January 1, 2008.  We are currentlyevaluating the impact of the provisions of SFAS No. 157.

In September 2006, FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans” (“SFAS No. 158”).  SFAS No. 158 requires an employer torecognize the over-funded or under-funded status of a defined benefitpostretirement plan

32

----

(other than a multiemployer plan) as an asset or liability inits statement of financial position and to recognize changes in that fundedstatus in the year in which the changes occur through comprehensiveincome.  This Statement also requires anemployer to measure the funded status of a plan as of the date of its year-endstatement of financial position, with limited exceptions.  We are currently evaluating the impact ofSFAS No. 158 on our financial statements and will adopt the statement effectiveDecember 31, 2006.

In September 2006, theSEC issued Staff Accounting Bulletin No. 108 “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (“SAB 108”). SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment.  Weadopted SAB 108 in September 2006 with no effect on our financial statements.

**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 risks from changes in interestrates, foreign currency exchange rates and commodity prices, including rawmaterials such as steel. We manage our exposure to these market risks throughour regular operating and financing activities, and, when deemed appropriate,through the use of derivatives. When utilized, derivatives are used as riskmanagement tools and not for trading or speculative purposes. See also the MarketRisk section 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 operation of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report.Based on this evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective at the reasonable assurance level.

33

----

There have been nochanges in the Company’s internal control over financial reporting during theCompany’s last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

**PART II     OTHERINFORMATION**

**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

34

----

**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: November  9, 2006   |
|                            |        |  |

 

35

----