**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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

**For the Quarterly Period Ended June 30,2007**

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

**For the transition period from                     to                    **

**Commission File Number 1 - 5332**

**P&F INDUSTRIES, INC.**

(Exactname of registrant as specified in its charter)

| **Delaware**                                                                                                                                                                                                                   |   | **22-1657413**                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of                                                                                                                                                                                               |   | (I.R.S. Employer  Identification Number) |
| incorporation or  organization)                                                                                                                                                                                                |   |                                     |
|                                                                                                                                                                                                                           |   |                                     |
| **445  Broadhollow Road, Suite 100, Melville, New York 11747**                                                                                                                                                                 |
| (Address of  principal executive offices)                              (Zip  Code) |
|                                                                                                                                                                                                                           |
| Registrant’s  telephone number, including area code:**(631) 694-9800**                                                                                                                                                    |

 

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days. Yes  x    No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (see definition of “acceleratedfiler and large accelerated filer” in rule 12b-2 of the Exchange Act).

LargeAccelerated Filer o Accelerated Filer  o  Non-Accelerated Filer  x

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

As ofAugust 10, 2007, there were 3,637,462 shares of the registrant’s Class A CommonStock outstanding.

 

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**P&F INDUSTRIES, INC.**

**FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDED JUNE 30,2007**

**TABLE OF CONTENTS**
| **PART I – FINANCIAL  INFORMATION** |   |                                                                                                                 |
|------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|
| ** **                               |   |                                                                                                                 |
| Item 1.                                  |   | Financial Statements  (unaudited)                                                                                    |   |   |
|                                     |   |                                                                                                                 |   |   |
|                                     |   | Consolidated  Condensed Balance Sheets as of June 30, 2007 and December 31, 2006                                     |   |   |
|                                     |   |                                                                                                                 |   |   |
|                                     |   | Consolidated  Condensed Statements of Earnings for the three months and six months ended  June 30, 2007 and 2006     |   |   |
|                                     |   |                                                                                                                 |   |   |
|                                     |   | Consolidated  Condensed Statement of Shareholders’ Equity for the period from January 1,  2007 to June 30, 2007 |   |   |
|                                     |   |                                                                                                                 |   |   |
|                                     |   | Consolidated  Condensed Statements of Cash Flows for the six months ended June 30, 2007 and  2006                    |   |   |
|                                     |   |                                                                                                                 |   |   |
|                                     |   | Notes to  Consolidated Condensed 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 1.                                  |   | Legal Proceedings                                                                                                    |   |   |
|                                     |   |                                                                                                                 |   |   |
| Item  1A.                                |   | Risk  Factors                                                                                                        |   |   |
|                                     |   |                                                                                                                 |   |   |
| Item 2.                                  |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         |   |   |
|                                     |   |                                                                                                                 |   |   |
| Item 3.                                  |   | Defaults Upon  Senior Securities                                                                                     |   |   |
|                                     |   |                                                                                                                 |   |   |
| Item 4.                                  |   | Submission of  Matters to a Vote of Security Holders                                                                 |   |   |
|                                     |   |                                                                                                                 |   |   |
| Item 5.                                  |   | Other Information                                                                                                    |   |   |
|                                     |   |                                                                                                                 |   |   |
| Item  6.                                 |   | Exhibits                                                                                                             |   |   |
|                                     |   |                                                                                                                 |   |   |
| **Signature**                            |   |                                                                                                                 |
| ** **                               |   |                                                                                                                 |
| **Exhibit  Index**                       |   |                                                                                                                 |

 

i

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**PART I - FINANCIAL INFORMATION**

**Item 1.            FinancialStatements**

**P&F INDUSTRIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED BALANCE SHEETS**
| ** **                                      | ** ** | **June 30, 2007** | ** **  | **December 31,   2006**                           | ** ** |
|-------------------------------------------------|------------|-----------------------------|-------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**             | ** **  | **(derived from  audited financial  statements)** | ** ** |
| **ASSETS**                                      |       |                        |        |                                                        |       |
| CURRENT                                         |       |                        |        |                                                        |       |
| Cash and cash  equivalents                      |       | $                           | 1,173,915   |                                                        | $          | 1,339,882 |   |
| Accounts  receivable – net                 |       | 16,669,341                  |        | 12,685,388                                                  |       |
| Notes and other  receivables                    |       | 368,544                     |        | 1,206,600                                                   |       |
| Inventories – net                          |       | 34,125,275                  |        | 26,692,615                                                  |       |
| Deferred income  taxes – net               |       | 980,000                     |        | 980,000                                                     |       |
| Assets held for  sale                           |       | —                      |        | 576,535                                                     |       |
| Assets of  discontinued operations              |       | 34,401                      |        | 300,339                                                     |       |
| Income tax  refund receivable                   |       | 344,515                     |        | 1,356,310                                                   |       |
| Prepaid expenses  and other current assets      |       | 1,082,828                   |        | 1,369,403                                                   |       |
| TOTAL CURRENT  ASSETS                           |       | 54,778,819                  |        | 46,507,072                                                  |       |
|                                            |       |                        |        |                                                        |       |
| PROPERTY AND EQUIPMENT                          |       |                        |        |                                                        |       |
| Land                                            |       | 1,549,773                   |        | 1,174,773                                                   |       |
| Buildings and  improvements                     |       | 7,549,153                   |        | 5,716,144                                                   |       |
| Machinery and  equipment                        |       | 15,369,369                  |        | 9,249,720                                                   |       |
|                                            |       | 24,468,295                  |        | 16,140,637                                                  |       |
| Less accumulated  depreciation and amortization |       | 9,140,889                   |        | 8,411,447                                                   |       |
| NET PROPERTY AND  EQUIPMENT                     |       | 15,327,406                  |        | 7,729,190                                                   |       |
|                                            |       |                        |        |                                                        |       |
| GOODWILL                                        |       | 25,182,369                  |        | 24,921,473                                                  |       |
|                                            |       |                        |        |                                                        |       |
| OTHER INTANGIBLE ASSETS  – net             |       | 13,848,264                  |        | 10,897,333                                                  |       |
|                                            |       |                        |        |                                                        |       |
| ASSETS OF DISCONTINUED  OPERATIONS              |       | 25,164                      |        | 40,436                                                      |       |
|                                            |       |                        |        |                                                        |       |
| OTHER ASSETS – net                         |       | 194,212                     |        | 311,721                                                     |       |
|                                            |       |                        |        |                                                        |       |
| TOTAL ASSETS                                    |       | $                           | 109,356,234 |                                                        | $          | 90,407,225 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

1

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** **
| ** **                                                                                                                                      | ** ** | **June 30, 2007** | ** **  | **December 31,  2006**                                 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-------------------------------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **(unaudited)**             | ** **  | **(derived from  audited financial  statements)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                    |       |                        |        |                                                        |       |
| CURRENT  LIABILITIES                                                                                                                            |       |                        |        |                                                        |       |
| Short-term borrowings                                                                                                                           |       | $                           | 5,500,000   |                                                        | $          | 3,000,000 |   |
| Accounts payable                                                                                                                                |       | 8,533,317                   |        | 7,691,869                                                   |       |
| Income taxes payable                                                                                                                            |       | 1,903,067                   |        | 435,237                                                     |       |
| Accrued compensation                                                                                                                            |       | 1,636,453                   |        | 2,158,279                                                   |       |
| Other accrued liabilities                                                                                                                       |       | 2,884,754                   |        | 3,068,036                                                   |       |
| Current maturities of long-term debt                                                                                                            |       | 8,703,053                   |        | 7,559,681                                                   |       |
| Liabilities of discontinued operations                                                                                                          |       | 435,353                     |        | 1,426,222                                                   |       |
| TOTAL CURRENT LIABILITIES                                                                                                                       |       | 29,595,997                  |        | 25,339,324                                                  |       |
|                                                                                                                                            |       |                        |        |                                                        |       |
| LONG-TERM DEBT,  less current maturities                                                                                                        |       | 22,898,618                  |        | 12,059,758                                                  |       |
|                                                                                                                                            |       |                        |        |                                                        |       |
| LIABILITIES OF  DISCONTINUED OPERATIONS                                                                                                         |       | 347,753                     |        | 352,971                                                     |       |
|                                                                                                                                            |       |                        |        |                                                        |       |
| DEFERRED INCOME  TAXES – net                                                                                                               |       | 1,134,000                   |        | 1,134,000                                                   |       |
| TOTAL LIABILITIES                                                                                                                               |       | 53,976,368                  |        | 38,886,053                                                  |       |
|                                                                                                                                            |       |                        |        |                                                        |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                  |       |                        |        |                                                        |       |
|                                                                                                                                            |       |                        |        |                                                        |       |
| SHAREHOLDERS’  EQUITY                                                                                                                      |       |                        |        |                                                        |       |
| Preferred stock - $10 par; authorized - 2,000,000  shares; no shares outstanding                                                                |       | —                      |        | —                                                      |       |
| Common stock                                                                                                                                    |       |                        |        |                                                        |       |
| Class A - $1 par; authorized - 7,000,000 shares;  issued - 3,889,767 and 3,850,367 shares at June 30, 2007 and December 31,  2006, respectively |       | 3,889,767                   |        | 3,850,367                                                   |       |
| Class B - $1 par; authorized - 2,000,000 shares; no  shares issued                                                                              |       | —                      |        | —                                                      |       |
| Additional paid-in capital                                                                                                                      |       | 9,708,149                   |        | 9,191,598                                                   |       |
| Retained earnings                                                                                                                               |       | 44,235,746                  |        | 40,850,384                                                  |       |
| Treasury stock, at cost - 279,754 and 272,607 shares  at June 30, 2007 and December 31, 2006, respectively                                      |       | (2,453,796                  | )           | (2,371,177                                                  | )          |
|                                                                                                                                            |       |                        |        |                                                        |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                 |       | 55,379,866                  |        | 51,521,172                                                  |       |
|                                                                                                                                            |       |                        |        |                                                        |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                |       | $                           | 109,356,234 |                                                        | $          | 90,407,225 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

2

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF EARNINGS (unaudited)**
| ** **                                                                                                                                                                 | ** ** | **Three months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                                                                                                                                                               |       | $                                               | 30,607,864 |                                          | $          | 28,860,361 |   | $ | 55,566,751 |   | $ | 55,709,864 |   |
| Cost of sales                                                                                                                                                              |       | 21,530,979                                      |       | 19,452,109                                    |       | 38,742,263 |   | 38,054,312 |   |
| Gross profit                                                                                                                                                               |       | 9,076,885                                       |       | 9,408,252                                     |       | 16,824,488 |   | 17,655,552 |   |
| Selling, general  and administrative expenses                                                                                                                              |       | 7,814,457                                       |       | 6,748,455                                     |       | 14,667,646 |   | 13,047,845 |   |
| Operating income                                                                                                                                                           |       | 1,262,428                                       |       | 2,659,797                                     |       | 2,156,842 |   | 4,607,707 |   |
| Interest expense – net                                                                                                                                                |       | 831,081                                         |       | 522,058                                       |       | 1,482,739 |   | 1,014,012 |   |
| Earnings from  continuing operations before income taxes                                                                                                                   |       | 431,347                                         |       | 2,137,739                                     |       | 674,103 |   | 3,593,695 |   |
| Income taxes                                                                                                                                                               |       | 201,000                                         |       | 854,000                                       |       | 297,000 |   | 1,438,000 |   |
| Earnings from  continuing operations                                                                                                                                       |       | 230,347                                         |       | 1,283,739                                     |       | 377,103 |   | 2,155,695 |   |
|                                                                                                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Earnings (loss) from operation of discontinued  operations (net of tax expense (benefit) of $2,000 and $(12,000) for 2007 and  $30,000 and $31,000 for 2006, respectively) |       | 2,666                                           |       | 43,416                                        |       | (18,301 | ) | 45,461 |   |
| Gain on sale of assets of discontinued operations  (net of tax expense of $2,093,000 for 2007)                                                                             |       | 3,026,560                                       |       | —                                        |       | 3,026,560 |   | — |   |
|                                                                                                                                                                       |       | 3,029,226                                       |       | 43,416                                        |       | 3,008,259 |   | 45,461 |   |
| Net earnings                                                                                                                                                               |       | $                                               | 3,259,573  |                                          | $          | 1,327,155 |   | $ | 3,385,362 |   | $ | 2,201,156 |   |
| Basic earnings  per common share:                                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                                                                                                                                                      |       | $                                               | .07        |                                          | $          | .36 |   | $ | .10 |   | $ | .60 |   |
| Discontinued operations                                                                                                                                                    |       | .84                                             |       | .01                                           |       | .84 |   | .01 |   |
|                                                                                                                                                                       |       | $                                               | .91        |                                          | $          | .37 |   | $ | .94 |   | $ | .61 |   |
|                                                                                                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Diluted earnings  per common share:                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                                                                                                                                                      |       | $                                               | .06        |                                          | $          | .34 |   | $ | .10 |   | $ | .56 |   |
| Discontinued operations                                                                                                                                                    |       | .80                                             |       | .01                                           |       | .79 |   | .01 |   |
|                                                                                                                                                                       |       | $                                               | .86        |                                          | $          | .35 |   | $ | .89 |   | $ | .57 |   |
|                                                                                                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  common shares outstanding:                                                                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                                                                                      |       | 3,596,703                                       |       | 3,577,760                                     |       | 3,589,155 |   | 3,580,834 |   |
| Diluted                                                                                                                                                                    |       | 3,796,962                                       |       | 3,825,317                                     |       | 3,799,613 |   | 3,828,773 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

3

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**P&F INDUSTRIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTOF SHAREHOLDERS’ EQUITY (unaudited)**
| ** **                                                       | ** ** | ** ** | ** ** | **Class A Common   Stock, $1 Par ** | ** ** | **Additional  paid-in** | ** ** | **Retained** | ** ** | **Treasury stock** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **Total**  | ** ** | **Shares**                                                        | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                                                       |       |       |       |                                                              |       |                    |       |         |       |                    |       |   |   |   |   |
| **Balance,  January 1, 2007**                                    |       | $          | 51,521,172 |                                                              | 3,850,367  |                    | $          | 3,850,367    |       | $                       | 9,191,598  |   | $ | 40,850,384 |   | (272,607 | ) | $ | (2,371,177 | ) |
| ** **                                                       |       |       |       |                                                              |       |                    |       |         |       |                    |       |   |   |   |   |
| Net earnings                                                     |       | 3,385,362  |       | —                                                            |       | —                  |       | —       |       | 3,385,362               |       | — |   | — |   |
| Stock-based  compensation                                        |       | 250,976    |       | —                                                            |       | —                  |       | 250,976      |       | —                  |       | — |   | — |   |
| Tax benefits  from exercise of stock options                     |       | 100,000    |       | —                                                            |       | —                  |       | 100,000      |       | —                  |       | — |   | — |   |
| Shares  surrendered as payment for exercise of stock options     |       | (82,619    | )          | —                                                            |       | —                  |       | —       |       | —                  |       | (7,147 | ) | (82,619 | ) |
| Issuance of  Class A common stock upon exercise of stock options |       | 204,975    |       | 39,400                                                            |       | 39,400                  |       | 165,575      |       | —                  |       | — |   | — |   |
| **Balance, June 30, 2007**                                       |       | $          | 55,379,866 |                                                              | 3,889,767  |                    | $          | 3,889,767    |       | $                       | 9,708,149  |   | $ | 44,235,746 |   | (279,754 | ) | $ | (2,453,796 | ) |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

4

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**P&F INDUSTRIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS (unaudited)**
| ** **                                                                                                              | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Cash Flows from  Operating Activities of Continuing Operations:                                                         |       |                                              |       |   |   |
| Net earnings                                                                                                            |       | $                                                 | 3,385,362  |   | $ | 2,201,156 |   |
| Earnings from discontinued operations – net of taxes                                                               |       | (3,008,259                                        | )          | (45,461 | ) |
| Adjustments to reconcile net earnings to net cash  (used in) provided by operating activities of continuing operations: |       |                                              |       |   |   |
| Non-cash charges and credits:                                                                                           |       |                                              |       |   |   |
| Depreciation and amortization                                                                                           |       | 729,442                                           |       | 453,133 |   |
| Amortization of other intangible assets                                                                                 |       | 708,069                                           |       | 598,750 |   |
| Amortization of other assets                                                                                            |       | 2,631                                             |       | 3,000 |   |
| Provision for losses on accounts receivable - net                                                                       |       | 72,747                                            |       | 14,755 |   |
| Stock-based compensation                                                                                                |       | 250,976                                           |       | 35,582 |   |
| Changes in  operating assets and liabilities, net of assets and liabilities acquired:                                   |       |                                              |       |   |   |
| Accounts receivable                                                                                                     |       | (915,284                                          | )          | (655,327 | ) |
| Notes and other receivables                                                                                             |       | 838,056                                           |       | 1,296,467 |   |
| Inventories                                                                                                             |       | (217,967                                          | )          | 686,681 |   |
| Income tax refund receivable                                                                                            |       | 1,011,795                                         |       | — |   |
| Prepaid expenses and other current assets                                                                               |       | 340,910                                           |       | (10,693 | ) |
| Other assets                                                                                                            |       | 209,878                                           |       | 358,217 |   |
| Accounts payable                                                                                                        |       | 841,448                                           |       | 1,567,213 |   |
| Accruals and other                                                                                                      |       | (282,523                                          | )          | (1,178,280 | ) |
| Total adjustments                                                                                                       |       | 581,919                                           |       | 3,124,037 |   |
| Net cash  provided by operating activities of continuing operations                                                     |       | $                                                 | 3,967,281  |   | $ | 5,325,193 |   |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

5

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| ** **                                                                               | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Cash Flows from  Investing Activities of Continuing Operations:                          |       |                                              |       |   |   |
| Capital expenditures                                                                     |       | $                                                 | (958,687   | ) | $ | (908,124 | ) |
| Purchase of certain assets, net of certain  liabilities, of Hy-Tech Machine, Inc.        |       | (20,749,066                                       | )          | — |   |
| Purchase of certain assets, net of certain  liabilities, of Pacific Stair Products, Inc. |       | —                                            |       | (5,402,218 | ) |
| Net cash used in investing activities of continuing  operations                          |       | (21,707,753                                       | )          | (6,310,342 | ) |
|                                                                                     |       |                                              |       |   |   |
| Cash Flows from  Financing Activities of Continuing Operations:                          |       |                                              |       |   |   |
| Proceeds from short-term borrowings                                                      |       | 8,000,000                                         |       | 11,000,000 |   |
| Repayments of short-term borrowings                                                      |       | (5,500,000                                        | )          | (7,500,000 | ) |
| Proceeds from term loan                                                                  |       | 19,000,000                                        |       | — |   |
| Repayments of term loan                                                                  |       | (6,900,000                                        | )          | (1,900,000 | ) |
| Principal payments on long-term debt                                                     |       | (117,768                                          | )          | (115,515 | ) |
| Proceeds from exercise of stock options                                                  |       | 122,356                                           |       | 146,730 |   |
| Tax benefits from the exercise of stock options                                          |       | 100,000                                           |       | — |   |
| Purchase of Class A common stock                                                         |       | —                                            |       | (294,196 | ) |
| Net cash provided by financing activities of  continuing operations                      |       | 14,704,588                                        |       | 1,337,019 |   |
|                                                                                     |       |                                              |       |   |   |
| Cash Flows from  Discontinued Operations:                                                |       |                                              |       |   |   |
| Net cash provided by (used in) operating activities                                      |       | 520,939                                           |       | (565,038 | ) |
| Net cash provided by investing activities                                                |       | 3,603,095                                         |       | — |   |
| Net cash used in financing activities                                                    |       | (1,254,117                                        | )          | (56,577 | ) |
| Net cash provided by (used in) discontinued  operations                                  |       | 2,869,917                                         |       | (621,615 | ) |
|                                                                                     |       |                                              |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                               |       | (165,967                                          | )          | (269,745 | ) |
| Cash and cash  equivalents at beginning of period                                        |       | 1,339,882                                         |       | 1,771,624 |   |
| Cash and cash  equivalents at end of period                                              |       | $                                                 | 1,173,915  |   | $ | 1,501,879 |   |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

6

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| ** **                                              | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                              |       |                                              |       |   |   |
| **Supplemental  disclosures of cash flow information:** |       |                                              |       |   |   |
| ** **                                              |       |                                              |       |   |   |
| Cash paid for:                                          |       |                                              |       |   |   |
| Interest                                                |       | $                                                 | 1,297,000  |   | $ | 949,000 |   |
| Income taxes                                            |       | $                                                 | 185,000    |   | $ | 2,945,000 |   |

 

Non-cash investing and financing activities wereas follows:

During the six months ended June 30, 2007, the Companyreceived 7,147 shares of Class A Common Stock in connection with the exerciseof options to purchase 30,000 shares of Class A Common Stock. The value ofthese shares was recorded at $82,619.

During the six months ended June 30, 2006, theCompany received 5,000 shares of Class A Common Stock in connection with theexercise of options to purchase 15,000 shares of Class A Common Stock. Thevalue of these shares was recorded at $61,850.

See accompanying notes to consolidated condensedfinancial statements (unaudited).

7

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**P&F INDUSTRIES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED****CONDENSED****FINANCIAL STATEMENTS (unaudited)**

**NOTE 1 - SUMMARY OF ACCOUNTINGPOLICIES**

**Principles of Consolidation**

The unaudited consolidated condensed financial statementscontained herein include the accounts of P&F Industries, Inc. and itssubsidiaries (“P&F”). All significant intercompany balances andtransactions have been eliminated.

P&F conducts its business operations through two ofits wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”) andCountrywide Hardware, Inc. (“Countrywide”). On June 29, 2007, P&Ftransferred its sole and direct ownership interest in Florida PneumaticManufacturing Corporation (“Florida Pneumatic”) to Continental. P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.

Continental conducts its business operations throughFlorida Pneumatic and Hy-Tech Machine, Inc., a Delaware corporation (“Hy-Tech”).Florida Pneumatic is engaged in the importation, manufacture and sale ofpneumatic hand tools, primarily for the industrial, retail and automotivemarkets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, Florida Pneumaticimports a line of door and window hardware. In February 2007, Hy-Tech acquired substantiallyall of the operating assets of Hy-Tech Machine, Inc., a Pennsylvaniacorporation, and Quality Gear & Machine, Inc. and certain real propertyfrom HTM Associates. Hy-Tech is primarily engaged in the manufacture anddistribution of pneumatic tools and parts for industrial applications.

Countrywide conducts its business operations throughNationwide Industries, Inc. (“Nationwide”), Woodmark International, L.P. (“Woodmark”),a limited partnership between Countrywide and WILP Holdings, Inc., a subsidiaryof P&F, and Pacific Stair Products, Inc. (“Pacific Stair”). Nationwide isan importer and manufacturer of door, window and fencing hardware. Woodmark isan importer of builders’ hardware, including staircase components and kitchen and bath hardware andaccessories. Pacific Stair manufacturespremium stair rail products and distributes Woodmark’s staircase components tothe building industry, primarily in southern California and the southwesternregion of the United States.

TheCompany’s wholly-owned subsidiary, EmbassyIndustries, Inc. (“Embassy”), was engaged in the manufacture and sale ofbaseboard heating products and the importation and sale of radiant heatingsystems until it exited that business in October 2005 through the sale ofsubstantially all of its non-real estate assets. Embassy sold its real estateassets in June 2007. The Company’s wholly-owned subsidiary, GreenManufacturing, Inc. (“Green”), was primarily engaged in the manufacture,development and sale of heavy-duty welded custom designed hydraulic cylinders,a line of access equipment for the petro-chemical industry and a line of posthole digging equipment for the agricultural industry until it exited thosebusinesses between December 2004 and July 2005. The assets and liabilities andresults of operations of Embassy and Green have been segregated and reportedseparately as discontinued operations in the Consolidated Condensed FinancialStatements. Note 12 to the Notes to Consolidated Condensed Financial Statementspresents financial information for the segments of the Company’s business.

8

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**Basis of Financial Statement Presentation**

The accompanying unaudited consolidated condensedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information, and with the rules and regulations of the Securities andExchange Commission regarding interim financial reporting. Accordingly, theseinterim financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion of the Company,these unaudited consolidated condensed financial statements include alladjustments necessary to present fairly the information set forth therein. Allsuch adjustments are of a normal recurring nature. Results for interim periodsare not necessarily indicative of results to be expected for a full year.

The resultsof operations for Embassy and Green have been segregated from continuingoperations and are reflected on the consolidated condensed statements ofearnings as discontinued operations.

The unaudited consolidated condensed balance sheetinformation as of December 31, 2006 was derived from the audited financialstatements included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006. The interim financial statements contained hereinshould be read in conjunction with that Report.

In preparing its unaudited consolidated condensedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, the Company is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. On an ongoing basis, the Company evaluates estimates, including thoserelated to bad debts, inventory reserves, goodwill and intangible assets. TheCompany bases its estimates on historical data and experience, when available,and on various other assumptions that are believed to be reasonable under thecircumstances, the combined results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actualresults could differ from those estimates.

**Income Taxes**

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation, or FIN, No.48, “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 109, “Accounting for Income Taxes”.   FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN 48 was effective for fiscal yearsbeginning after December 15, 2006. The adoption of this statement did not havea material effect on the Company’s financial position or results of operations.

TheCompany files a consolidated Federal tax return. P&F Industries, Inc. andeach of its subsidiaries file separate state and local tax returns.

In 2007, the Internal Revenue Servicecompleted its examination of the Company’s Federal tax returns for the years2003 and 2004 and issued a Revenue Agent’s Report that reported no change tothe returns as filed. All examinations of tax years prior to 2003 have beenpreviously completed.

9

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In addition, the Company and certain of itssubsidiaries file tax returns in the states of New York and Florida that arecurrently under audit for years ranging from 2001 through 2005. At December 31,2006, the Company had recorded approximately $395,000 in tax liabilitiesrelated to an uncertain income tax position resulting from the pending stateaudit by Florida. The Company does not expect that the completion of theseaudits would result in any additional assessment that would have a materialeffect on its financial position or results of operations.

The Company accounts for interest and penaltiesrelated to income tax matters in income tax expense. The Company had accruedinterest of approximately $165,000 as of December 31, 2006. During the sixmonths ended June 30, 2007, there was an additional interest accrual of $34,000.

In June 2006, the FASB ratified the consensusreached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-3, “How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross versus Net Presentation)”, (“ EITF 06-3”).EITF 06-3 includes any tax assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer and may include, but is not limited to, sales, use, value added, andsome excise taxes. EITF 06-3 concludes that the presentation of taxes on eithera gross (included in revenues and costs) or a net (excluded from revenues)basis is an accounting policy decision that should be disclosed. In addition,for any such taxes that are reported on a gross basis, a company shoulddisclose the amounts of those taxes in interim and annual financial statementsfor each period for which an income statement is presented if those amounts aresignificant. The provisions of EITF 06-3 are to be applied to financial reportsfor interim and annual reporting periods beginning after December 15, 2006. Theadoption of this statement did not have a material effect on the Company’sfinancial position or results of operations.

**Reclassifications**

Certain amounts in the Consolidated CondensedFinancial Statements at December 31, 2006 have been reclassified to conform tothe current period’s presentation.

**NOTE 2 - EARNINGS PER SHARE**

Basic earnings per common share is based only on theaverage number of shares of common stock outstanding for the periods. Dilutedearnings per common share reflects the effect of shares of common stockissuable upon the exercise of options, unless the effect on earnings isantidilutive.

Diluted earnings per common share is computed using thetreasury stock method. Under this method, the aggregate number of shares ofcommon stock outstanding reflects the assumed use of proceeds from thehypothetical exercise of any outstanding options or warrants to purchase sharesof the Company’s Class A Common Stock. The average market value for the periodis used as the assumed purchase price.

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The following table sets forth the computation of basicand diluted earnings per common share:
| ** **                                                                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2007**                                        | ** ** | **2006**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerator:                                                                                                          |       |                                            |       |                                    |       |   |   |   |   |
| Numerator for basic and diluted earnings per common  share:                                                         |       |                                            |       |                                    |       |   |   |   |   |
| Earnings from continuing operations                                                                                 |       | $                                               | 231,000    |                                    | $          | 1,284,000 |   | $ | 377,000 |   | $ | 2,156,000 |   |
| Discontinued operations, net of taxes                                                                               |       | 3,029,000                                       |       | 43,000                                  |       | 3,008,000 |   | 45,000 |   |
| Net earnings                                                                                                        |       | $                                               | 3,260,000  |                                    | $          | 1,327,000 |   | $ | 3,385,000 |   | $ | 2,201,000 |   |
|                                                                                                                |       |                                            |       |                                    |       |   |   |   |   |
| Denominator:                                                                                                        |       |                                            |       |                                    |       |   |   |   |   |
| Denominator for basic earnings per share – weighted  average common shares outstanding                         |       | 3,597,000                                       |       | 3,578,000                               |       | 3,589,000 |   | 3,581,000 |   |
| Effect of dilutive securities:                                                                                      |       |                                            |       |                                    |       |   |   |   |   |
| Stock options                                                                                                       |       | 200,000                                         |       | 247,000                                 |       | 211,000 |   | 248,000 |   |
| Denominator for  diluted earnings per share – adjusted weighted average common shares and  assumed conversions |       | 3,797,000                                       |       | 3,825,000                               |       | 3,800,000 |   | 3,829,000 |   |

 

At June 30, 2007 and 2006 and during the three-month andsix-month periods ended June 30, 2007 and 2006, there were outstanding stockoptions whose exercise prices were higher than the average market values of theunderlying Class A Common Stock for the period. These options are antidilutiveand are excluded from the computation of earnings per share. The weightedaverage antidilutive stock options outstanding were as follows:
| ** **                                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  antidilutive stock options outstanding |       | 29,500                                          |       | 29,500                                        |       | 29,500 |   | 29,500 |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

Stock-basedCompensation

On January 1, 2006, the Company adopted the provisions ofFASB Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment” (“Statement 123(R)”), which revises FASB SFAS No. 123, “Accounting forStock-Based Compensation”, and supersedes APB Opinion 25, “Accounting for StockIssued to Employees”. Statement 123(R) requires the Company to recognizeexpense related to the fair value of our stock-based compensation awards,including employee stock options.

Duringthe six months ended June 30, 2007 and 2006, the Company granted options topurchase 92,500 and nil shares, respectively, of the Company’s common stock.The total intrinsic value of stock options exercised during the six monthsended June 30, 2007 and 2006 was $258,000 and $223,000, respectively.

As a result of adopting Statement 123(R), theCompany recorded stock-based compensation expense for the three-month periodsended June 30, 2007 and 2006 of approximately $245,000 and $18,000,respectively, and for the six-month periods ended June 30, 2007 and 2006 ofapproximately $251,000 and $36,000, respectively. Compensation expense isrecognized in the general and 

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administrative expenses line item of the Company’s statements ofearnings on a straight-line basis over the vesting periods. There are no capitalizedstock-based compensation costs at June 30, 2007 and 2006. The adoption ofStatement 123(R) had no material impact on our basic and dilutive earnings percommon share for the three-month and six-month periods ended June 30, 2007 and2006. The Companyrecognizes compensation cost over the requisite service period. However, theexercisability of the respective non-vested options, which are atpre-determined dates on a calendar year, do not necessarily correspond to theperiod(s) in which straight-line amortization of compensation cost is recorded.As of June 30, 2007, the Company hadapproximately $304,000 of total unrecognized compensation cost related tonon-vested awards granted under our share-based plans, which we expect torecognize over a weighted-average period of 3.0 years.

The Company received cash of approximately $122,000 and$147,000 from options exercised during the six months ended June 30, 2007 and2006, respectively. The impact of these cash receipts is included in financingactivities in the accompanying consolidated condensed statements of cash flows.Statement 123(R) requiresthat cash flows from tax benefits attributable to tax deductions in excess ofthe compensation cost recognized for those options (excess tax benefits) beclassified as financing cash flows.

There were no options granted during fiscal 2006.The fair values of the options granted during the six month period ended June30, 2007 were estimated on the date of the grant using the Black-Scholesoption-pricing model on the basis of the following weighted averageassumptions:
|                                                 | ** ** | **June 30, 2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| Risk-free  interest rate                        |       | 5.2                         | %          |
| Expected term  (in years)                       |       | 8.2                         |       |
| Volatility                                      |       | 34.9                        | %          |
| Dividend yield                                  |       | 0                           | %          |
| Weighted-average fair  value of options granted |       | $                           | 5.68       |   |
|                                                 |            |                             |            |  |

 

The expected term was based on historical exercisesand terminations. The volatility for the periods with the expected term of theoptions is determined using historical volatilities based on historical stockprices. The dividend yield is 0% as the Company has historically not declareddividends and does not expect to declare any in the future.

StockOption Plan

The Company’s 2002 Incentive Stock Option Plan (the “CurrentPlan”) authorizes the issuance, to employees and directors, of options to purchasea maximum of 1,100,000 shares of Class A Common Stock. These options must beissued within ten years of the effective date of the Plan and are exercisablefor a ten year period from the date of grant, at prices not less than 100% ofthe market value of the Class A Common Stock on the date the option is granted.Incentive stock options granted to any 10% stockholder are exercisable for afive year period from the date of grant, at prices not less than 110% of themarket value of the Class A Common Stock on the date the option is granted.Pursuant to the Current Plan, the Stock Option Committee has the discretion toaward non-qualified stock option grants. Options have vesting periods ofimmediate to three years. In the event options granted contain a vestingschedule over a period of years, the Company recognizes compensation cost forthese awards on a straight-line basis over the service period. The CurrentPlan, which terminates in 2012, is the successor to the Company’s 1992Incentive Stock Option Plan (the “Prior Plan”).

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The following is a summary of the changes in outstandingoptions for the six months ended June 30, 2007:
|                               | ** ** | **Option  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------|------------|--------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding,  January 1, 2007 |       | 560,900            |       | $                                          | 7.69       |                                                                 | 3.7        |                            |       |   |
| Granted                       |       | 92,500             |       | $                                          | 11.20      |                                                                 | —     |                            |       |   |
| Exercised                     |       | (39,400            | )          | $                                          | 5.20       |                                                                 | —     |                            |       |   |
| Forfeited                     |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Expired                       |       | (8,900             | )          | $                                          | 5.33       |                                                                 | —     |                            |       |   |
| Outstanding,  June 30, 2007   |       | 605,100            |       | $                                          | 8.42       |                                                                 | 4.5        |                            | $          | 1,722,000 |   |
|                          |       |               |       |                                       |       |                                                                 |       |                            |       |
| Vested, June 30, 2007         |       | 533,273            |       | $                                          | 8.14       |                                                                 | 4.1        |                            | $          | 1,670,000 |   |

 

The following is a summary ofchanges in non-vested shares for the six months ended June 30, 2007:
|                                     | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-  Date Fair Value** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------------------------------------------------|------------|
| Non-vested  shares, January 1, 2007 |       | 49,488                 |       | $                                                                | 3.77       |   |
| Granted                             |       | 45,000                 |       | $                                                                | 6.52       |   |
| Vested                              |       | (22,661                | )          | $                                                                | 4.68       |   |
| Forfeited                           |       | —                 |       | —                                                           |       |
| Non-vested shares, June  30, 2007   |       | 71,827                 |       | $                                                                | 5.20       |   |

 

The number of shares of Class A common stock reserved forstock options available for issuance under the Current Plan as of June 30, 2007was 590,900. Of the options outstanding at June 30, 2007, 438,600 were issuedunder the Current Plan and 166,500 were issued under the Prior Plan.

**NOTE 4 - FOREIGN CURRENCY TRANSACTIONS**

**Derivative Financial Instruments**

The Company uses derivatives to reduce its exposure tofluctuations in foreign currencies, principally Japanese yen. Derivativeproducts, specifically foreign currency forward contracts, are used to hedgethe foreign currency market exposures underlying certain debt and forecastedtransactions with foreign vendors. The Company does not enter into suchcontracts for speculative purposes.

For derivative instruments that are designated andqualify as fair value hedges (i.e., hedging the exposure to changes in the fairvalue of an asset or a liability or an identified portion thereof that isattributable to a particular risk), the gain or loss on the derivativeinstrument as well as the offsetting gain or loss on the hedge item attributableto the hedged risk are recognized in earnings in the current period. Forderivative instruments that are designated and qualify as a cash flow hedge(i.e., hedging the exposure of variability in the expected future cash flowsthat would be attributable to a particular risk), the effective portion of thegain or loss on the derivative instrument is reported as a component ofaccumulated comprehensive loss (a component of shareholders’ equity) andreclassified into earnings in the same period or periods during which thehedged transaction affects earnings. The remaining gain or loss on thederivative instrument, if any (i.e., the ineffective portion and any portion ofthe derivative instrument excluded from the assessment of effectiveness), isrecognized in earnings in the current period. For derivative instruments notdesignated as hedging instruments, changes in the fair market values arerecognized in earnings as a component of cost of sales. At June 30, 2007 and2006, all of the Company’s derivative instruments are designated as fair-valuehedging instruments.

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The Company accounts for changes in the fair value of itsforeign currency contracts by marking them to market and recognizing anyresulting gains or losses through its statement of earnings. The Company alsomarks its yen-denominated payables to market, recognizing any resulting gainsor losses in its statement of earnings. At June 30, 2007, the Company hadforeign currency forward contracts, maturing in 2007, to purchase Japanese yenat contracted forward rates. The value of these contracts at June 30, 2007,based on that day’s closing spot rate, was approximately $459,000, which wasthe approximate value of the Company’s yen-denominated accounts payable. Duringthe three-month periods ended June 30, 2007 and 2006, the Company recorded inits cost of sales realized gains (losses) of approximately $(14,000) and$3,000, respectively, on foreign currency transactions. During the six-monthperiods ended June 30, 2007 and 2006, the Company recorded in its cost of salesrealized gains (losses) of approximately $(27,000) and $4,000, respectively, onforeign currency transactions. At June 30, 2007 and 2006, the Company hadunrealized gains of $13,000 and $3,000, respectively, on foreign currency transactions.

**NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS**

**Adoption of New Accounting Pronouncements**

In March 2006, the FASB issued SFAS No. 156, “Accountingfor Servicing of Financial Assets - an amendment of SFAS No. 140.” SFAS No. 156requires the recognition of a servicing asset or liability each time a companyundertakes an obligation to service a financial asset in certain situations. Itrequires all separately recognized servicing assets and liabilities to beinitially measured at fair value, if practical. SFAS No. 156 was effective asof the beginning of a company’s first fiscal year that began after September15, 2006. The adoption of this statement did not have a material effecton our financial position or results of operations.

In February 2006, FASB issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments - an amendment of SFAS No. 133 and140.” SFAS No. 155 allows companies to elect to measure at fair value entirefinancial instruments containing embedded derivatives that would otherwise haveto be accounted for separately. It also requires companies to identifyinterests in securitized financial assets that are freestanding derivatives orcontain embedded derivatives that would have to be accounted for separately,clarifies which interest- and principal-only strips are subject to SFAS No.133, and amends SFAS No. 140 to revise the conditions of a qualifying specialpurpose entity due to the new requirement to identify whether interests insecuritized financial assets are freestanding derivatives or contain embeddedderivatives. SFAS No. 155 was effective for all financial instruments acquired,issued or subject to a remeasurement event after the beginning of a company’sfirst fiscal year that began after September 15, 2006. The adoption ofthis statement did not have a material effect on our financial position orresults of operations.

**Effect of Newly Issued But Not Yet Effective AccountingPronouncements**

In September 2006, the FASB issued SFAS No.157, “Fair Value Measurements”(“SFAS 157”). SFAS 157 provides a new single authoritative definition of fairvalue and provides enhanced guidance for measuring the fair value of assets andliabilities and requires additional disclosures related to the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFAS157 is effective for us as of January 1, 2008. The Company is currentlyevaluating the impact that the adoption of SFAS 157 may have on our financialposition or results of operations.

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**NOTE 6****–****ACQUISITION**

Hy-Tech Machine, Inc.

On February 14, 2007, pursuant to an Asset PurchaseAgreement (the “Hy-Tech APA”) effective as of February 12, 2007, Hy-Tech, aDelaware corporation and a wholly-owned subsidiary of Continental, acquiredsubstantially all of the assets (the “Hy-Tech Purchased Property”) of Hy-TechMachine, Inc., a Pennsylvania corporation, and Quality Gear & Machine,Inc., a Pennsylvania corporation (collectively, the “Hy-Tech Sellers”). Thepurchase price consisted of $16,900,000 in cash, subject to adjustments, plusthe assumption of certain payables and liabilities and the obligation to makecertain contingent payments based on factors described in the Hy-Tech APA. Thepurchase price was negotiated on the basis of the Hy-Tech Sellers’ historicalfinancial performance. The Hy-Tech Purchased Property was used by the Hy-TechSellers in the business of, among other things, manufacturing and sellingpneumatic tools and other tool products.

In connection with this acquisition, Hy-Techcontemporaneously entered into an Agreement of Sale with HTM Associates, aPennsylvania general partnership comprised of certain shareholders of theHy-Tech Sellers (“HTM”), pursuant to which Hy-Tech purchased certain realproperty located in Cranberry Township, Pennsylvania from HTM for $2,200,000 incash. The acquisition of the Hy-Tech Purchased Property and the real propertywas financed through the Company’s senior credit facility.

The Company also agreed to make additional payments(“Contingent Consideration”) to the Sellers. The amount of ContingentConsideration is to be based on a percentage of the average increase inearnings before interest, taxes, depreciation and amortization (“EBITDA”) overa two-year period from the date of acquisition, over a base year EBITDA of$4,473,000. In addition, the Company has agreed to make a further additionalpayment (“Additional Contingent Consideration”), subject to certain conditionsrelated to an exclusive supply agreement with a major customer and, to acertain extent and subject to certain provisions, the achievement of ContingentConsideration. This Additional Contingent consideration may not exceed$1,900,000. Any such additional payments for Contingent Consideration orAdditional Contingent Consideration, if any, would be payable on or aboutninety days subsequent to the second anniversary of the acquisition date andwill be treated by the Company as additions to goodwill.

Contemporaneouslywith this acquisition, the Company executed and delivered Amendment No. 7 toCredit Agreement with Citibank and another bank. The amendment, among otherthings, added Continental and Hy-Tech as additional co-borrowers and provides for new termloans in amounts not to exceed $19,000,000. The principal on the new term loannotes are payable in 25 consecutive quarterly installments of 1¤25 of theaggregate principal amount outstanding on January 31, 2008, commencing onJanuary 31, 2008. From the date of the amendment through January 31, 2008,monthly payments shall be made of interest only. The Company and theco-borrowers have the option to pay interest at a rate based on either thefluctuating prime rate, LIBOR or a combination of the two rates. The new termloan notes shall mature on January 31, 2014. The amendment also provided forthe amendment and restatement of certain existing term loan notes. Therevolving credit loan facility provides for a maximum of $18,000,000, withvarious sublimits, for direct borrowings, letters of credit, bankers’acceptances and equipment loans.

The purchase price for thisacquisition was as follows:
| Cash paid at closing from  new borrowings                     |   | $          | 19,100,000 |   |
|---------------------------------------------------------------|--------|------------|------------|--------|
| Estimated direct  acquisition costs                           |   | 896,000    |       |
| Total estimated  purchase price prior to net asset adjustment |   | 19,996,000 |       |
| Estimated net  asset adjustment                               |   | 753,000    |       |
| Total estimated  purchase price                               |   | $          | 20,749,000 |   |

 

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The following table presents the estimatedfair values of the net assets acquired and the amount allocated to goodwill:
| Accounts receivable, net                 |   |      |   | $          | 3,141,000  |   |
|------------------------------------------|--------|-----------|--------|------------|------------|--------|
| Inventories, net                         |   |      |   | 7,215,000  |       |
| Other current  assets                    |   |      |   | 54,000     |       |
| Other assets                             |   |      |   | 95,000     |       |
| Property and  equipment                  |   |      |   | 7,369,000  |       |
| Identifiable  intangible assets:         |   |      |   |       |       |
| Backlog                                  |   | $         | 94,000 |       |       |   |
| Customer relationships                   |   | 3,076,000 |   |       |       |
| Trademark                                |   | 199,000   |   |       |       |
| Engineering drawings                     |   | 290,000   |   | 3,659,000  |       |
|                                     |   |      |   | 21,533,000 |       |
| Less:  liabilities assumed               |   |      |   | 1,045,000  |       |
| Total fair value  of net assets acquired |   |      |   | 20,488,000 |       |
| Goodwill                                 |   |      |   | 261,000    |       |
| Total estimated  purchase price          |   |      |   | $          | 20,749,000 |   |
|                                          |        |           |        |            |            |        |  |

 

The Company obtained a preliminary valuationof the identifiable intangible assets through an independent third-party andmay be subject to change. The excess of the total purchase price over the fair value of the netassets acquired, including the value of the identifiable intangible assets, hasbeen allocated to goodwill. Goodwill will be amortized, for fifteen years, fortax purposes but not for financial reporting purposes. The fair values and estimated lives of theidentifiable intangible assets are based on current information and are subjectto change. The intangible assets subject to amortization will be amortized overfifteen years for tax purposes. For financial reporting purposes, usefullives have been assigned as follows:
| Backlog                 |   | 6 months   |
|-------------------------|--------|------------|
| Customer  relationships |   | 6-13 years |
| Trademark               |   | Indefinite |
| Engineering  drawings   |   | 20 years   |

 

Thefollowing table summarizes, on an unaudited pro forma basis, the combinedresults of operations of the Company and Hy-Tech as though the acquisitiontransaction had occurred as of January 1, 2006. The pro forma amounts giveeffect to appropriate adjustments for amortization of intangible assets,interest expense and income taxes. The pro forma amounts presented are notnecessarily indicative of either the actual consolidated operating results hadthe acquisition transaction occurred as of January 1, 2006 or of futureconsolidated operating results.
|                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                        |       | $                                | 30,608,000 |                           | $          | 33,340,000 |   | $ | 57,746,000 |   | $ | 64,669,000 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Net earnings                        |       | $                                | 3,260,000  |                           | $          | 1,506,000 |   | $ | 3,568,000 |   | $ | 2,558,000 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share of common stock |       |                             |       |                           |       |   |   |   |   |
| Basic                               |       | $                                | .91        |                           | $          | .42 |   | $ | .99 |   | $ | .71 |   |
| Diluted                             |       | $                                | .86        |                           | $          | .39 |   | $ | .94 |   | $ | .67 |   |

 

16

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**NOTE 7 – DISCONTINUED OPERATIONS**

Embassy Industries, Inc.

Pursuant to an Asset Purchase Agreement (the “EmbassyAPA”), dated as of October 11, 2005, among P&F, Embassy, Mestek, Inc. (“Mestek”)and Embassy Manufacturing, Inc., a wholly-owned subsidiary of Mestek (“EMI”),Embassy sold substantially all of its operating assets to EMI. The assets soldpursuant to the Embassy APA include, among others, machinery and equipment,inventory, accounts receivable and certain intangibles. Certain assets wereretained by Embassy, including, but not limited to, cash and title to any realproperty owned by Embassy at the consummation of the sale to EMI. Embassy has effectively ceased all operatingactivities.

On July 24, 2006, Embassy received a letter (the “PurchaserLetter”) from counsel to J. D’Addario & Company, Inc., a New Yorkcorporation (“Purchaser”), purporting to terminate that certain contractentered into by Embassy and Purchaser on January 13, 2006 (the “Agreement”, andas amended, the “Contract of Sale”). Pursuant to the Contract of Sale, Embassyagreed to sell its Farmingdale, New York premises (the “Farmingdale Premises”)to Purchaser for a purchase price of $6,403,000.

The Purchaser Letter purports to terminate theContract of Sale based upon Purchaser’s assertion that Embassy had notsatisfied certain requirements and demands that the escrow agent return thedownpayment with accrued interest, and that Purchaser be reimbursed for thecosts of survey and title examination.

Embassy informed Purchaser that its purportedtermination of the Contract of Sale was in default of its obligation toconsummate the purchase of the Farmingdale Premises under the terms of theContract of Sale. On August 2, 2006, Purchaser instituted an action againstEmbassy in the Supreme Court of the State of New York, County of Suffolk, forbreach of contract and return of downpayment, seeking $650,000, together withcosts of title and survey and interest thereon, and the cost of the action. Thedownpayment remains in escrow pending resolution of this matter. Embassybelieves the action is without merit and intends to vigorously defend it.

Embassy entered into a new contract of sale, datedas of February 26, 2007, on the Farmingdale Premises with Tell Realty LLC, anaffiliated entity of Sam Tell & Son, Inc., for a purchase price of $6.3million. Embassy sold the Farmingdale Premises in June 2007 and used theafter-tax proceeds from the sale to satisfy the mortgage on the building ofapproximately $1.2 million and to reduce its long-term debt. The Companyrecorded a pre-tax gain from the sale of approximately $5.1 million.

17

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The following amounts related to discontinuedoperations have been segregated from the Company’s continuing operations andare reported as assets held for sale and assets and liabilities of discontinuedoperations in the consolidated condensed balance sheets:
|                                                                   | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Assets held for  sale and assets of discontinued operations:      |       |                        |       |                            |       |
| Current:                                                          |       |                        |       |                            |       |
| Prepaid expenses                                                  |       | $                           | 34,000     |                            | $          | 300,000 |   |
| Assets held for sale                                              |       | —                      |       | 577,000                         |       |
| Subtotal                                                          |       | 34,000                      |       | 877,000                         |       |
| Long-term:                                                        |       |                        |       |                            |       |
| Other receivable                                                  |       | 25,000                      |       | 40,000                          |       |
| Total assets  held for sale and assets of discontinued operations |       | $                           | 59,000     |                            | $          | 917,000 |   |
|                                                              |       |                        |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                        |       |                            |       |
| Current:                                                          |       |                        |       |                            |       |
| Accounts payable and accrued expenses                             |       | $                           | 435,000    |                            | $          | 172,000 |   |
| Mortgage payable                                                  |       | —                      |       | 1,254,000                       |       |
| Subtotal                                                          |       | 435,000                     |       | 1,426,000                       |       |
| Long-term:                                                        |       |                        |       |                            |       |
| Pension obligation                                                |       | 348,000                     |       | 353,000                         |       |
| Total liabilities of  discontinued operations                     |       | $                           | 783,000    |                            | $          | 1,779,000 |   |

 

**NOTE 8 -******ACCOUNTSRECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS****

Accounts receivable - net consists of:
|                                  | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Trade accounts  receivable       |       | $                           | 17,001,000 |                            | $          | 12,908,000 |   |
| Allowance for  doubtful accounts |       | (332,000                    | )          | (223,000                        | )          |
|                             |       | $                           | 16,669,000 |                            | $          | 12,685,000 |   |

 

**NOTE 9 - INVENTORIES**

Inventories- net consist of:
|                                                   | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw material                                      |       | $                           | 2,443,000  |                            | $          | 2,537,000 |   |
| Work in process                                   |       | 2,017,000                   |       | 334,000                         |       |
| Finished goods                                    |       | 33,244,000                  |       | 25,651,000                      |       |
|                                              |       | 37,704,000                  |       | 28,522,000                      |       |
| Reserve for  obsolete and slow-moving inventories |       | (3,579,000                  | )          | (1,829,000                      | )          |
|                                              |       | $                           | 34,125,000 |                            | $          | 26,693,000 |   |

 

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**NOTE 10 - GOODWILL AND OTHER INTANGIBLE ASSETS**

The changes in the carryingamounts of goodwill for the six months ended June 30, 2007 are as follows:
| ** **                | ** ** | **Consolidated** | ** ** | **Tools and other  products** | ** ** | **Hardware** | ** ** |
|---------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Balance, January  1, 2007 |       | $                | 24,921,000 |                                    | $          | 2,394,000    |       | $ | 22,527,000 |   |
| Acquisition of  Hy-Tech   |       | 261,000          |       | 261,000                                 |       | —       |       |
| Balance, June 30, 2007    |       | $                | 25,182,000 |                                    | $          | 2,655,000    |       | $ | 22,527,000 |   |

 

Other intangible assets were as follows:
| ** **                             | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Cost**                    | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible  assets:              |       |                        |       |                            |       |   |   |   |   |
| Customer relationships  and backlog    |       | $                           | 14,130,000 |                            | $          | 3,653 ,000 |   | $ | 10,960,000 |   | $ | 3,055,000 |   |
| Vendor  relationship                   |       | 890,000                     |       | 267,000                         |       | 890,000 |   | 223,000 |   |
| Non-compete and  Employment agreements |       | 810,000                     |       | 775,000                         |       | 810,000 |   | 719,000 |   |
| Trademark/tradename                    |       | 2,339,000                   |       | —                          |       | 2,140,000 |   | — |   |
| Engineering  drawings                  |       | 290,000                     |       | 5,000                           |       | — |   | — |   |
| Licensing                              |       | 105,000                     |       | 16,000                          |       | 105,000 |   | 11,000 |   |
| Total                                  |       | $                           | 18,564,000 |                            | $          | 4,716,000 |   | $ | 14,905,000 |   | $ | 4,008,000 |   |

 

Amortization expense forintangible assets subject to amortization was as follows:
|            | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|            |       | $                                                   | 343,000    |                                              | $          | 300,000 |   | $ | 708,000 |   | $ | 599,000 |   |
|            |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |

 

Amortization expense foreach of the twelve-month periods ending June 30, 2008 through the twelve-monthperiod ending June 30, 2012, is estimated to be as follows: 2008 - $1,029,000; 2009 - $1,005,000; 2010 -$1,006,000; 2011 - $1,000,000 and 2012 - $996,000. The weighted averageamortization period for intangible assets was 13.1 years at June 30, 2007 and14.1 years at December 31, 2006.

**NOTE 11 - WARRANTY LIABILITY**

The Company offers to its customers warrantiesagainst product defects for periods primarily ranging from one to three years,with certain faucet hardware having a limited lifetime warranty, depending onthe specific product and terms of the customer purchase agreement. The Company’stypical warranties require it to repair or replace the defective productsduring the warranty period at no cost to the customer. At the time the productrevenue is recognized, the Company records a liability for estimated costsunder its warranties, which costs are estimated based on historical experience.The Company periodically assesses the adequacy of its recorded warrantyliability and adjusts the amounts as necessary. While the Company believes thatits estimated liability for product warranties is adequate, the estimatedliability for the product warranties could differ materially from future actualwarranty costs.

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Changes in the Company’s warrantyliability, included in other accrued liabilities, were as follows:
|                                                                     | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Balance,  beginning of period                                       |       | $                                                 | 368,000    |   | $ | 419,000 |   |
| Warranties  issued and changes in estimated pre-existing warranties |       | 555,000                                           |       | 329,000 |   |
| Actual warranty  costs incurred                                     |       | (556,000                                          | )          | (359,000 | ) |
| Balance, end of period                                              |       | $                                                 | 367,000    |   | $ | 389,000 |   |

 

**NOTE 12 - BUSINESS SEGMENTS**

TheCompany has organized its business into two reportable business segments: Toolsand other products, and Hardware. The Company is organized around these two distinct product segments,each of which has very different end users. For reporting purposes, FloridaPneumatic and Hy-Tech are combined in the “Tools and other products” segment,while Woodmark, Pacific Stair and Nationwide are combined in the “Hardware”segment. Results for Hy-Tech have been included since its respectiveacquisition date. The Company evaluatessegment performance based primarily on segment operating income. The accountingpolicies of each of the segments are the same as those described in Note 1.

The following presents financial information by segmentfor the three-month periods ended June 30, 2007 and 2006. Segment operatingincome excludes general corporate expenses, interest expense and income taxes.Identifiable assets are those assets directly owned or utilized by theparticular business segment.
| Three months ended June 30, 2007 | ** ** | **Consolidated** | ** **  | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------------|------------|------------------|-------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                | ** ** | ** **       | ** **  | ** **                              | ** ** | ** **   | ** ** |
| Revenues from unaffiliated  customers                     |       | $                | 30,608,000  |                                    | $          | 15,785,000   |       | $ | 14,823,000 |   |
|                                                      |       |             |        |                                    |       |         |       |
| Segment  operating income                                 |       | 3,327,000        |        | $                                       | 1,001,000  |         | $          | 2,326,000 |   |
| General  corporate expense                                |       | (2,065,000       | )           |                                    |       |         |       |
| Interest expense  – net                              |       | (831,000         | )           |                                    |       |         |       |
| Earnings from  continuing operations before income taxes  |       | $                | 431,000     |                                    |       |         |       |   |
|                                                      |       |             |        |                                    |       |         |       |
| Segment assets                                            |       | $                | 107,262,000 |                                    | $          | 48,527,000   |       | $ | 58,735,000 |   |
| Corporate assets  and assets of discontinued operations   |       | 2,094,000        |        |                                    |       |         |       |
| Total assets                                              |       | $                | 109,356,000 |                                    |       |         |       |   |

 

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| Three months ended June 30, 2006 | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                     |       | $                | 28,860,000 |                                    | $          | 9,565,000    |       | $ | 19,295,000 |   |
|                                                      |       |             |       |                                    |       |         |       |
| Segment  operating income                                 |       | 4,050,000        |       | $                                       | 591,000    |         | $          | 3,459,000 |   |
| General  corporate expense                                |       | (1,390,000       | )          |                                    |       |         |       |
| Interest expense  – net                              |       | (522,000         | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes  |       | $                | 2,138,000  |                                    |       |         |       |   |
|                                                      |       |             |       |                                    |       |         |       |
| Segment assets                                            |       | $                | 84,818,000 |                                    | $          | 23,838,000   |       | $ | 60,980,000 |   |
| Corporate assets  and assets of discontinued operations   |       | 5,493,000        |       |                                    |       |         |       |
| Total assets                                              |       | $                | 90,311,000 |                                    |       |         |       |   |

 
| Six months ended June 30, 2007  | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                               |       |             |       |                                    |       |         |       |
| Revenues from  unaffiliated customers                    |       | $                | 55,567,000 |                                    | $          | 27,398,000   |       | $ | 28,169,000 |   |
|                                                     |       |             |       |                                    |       |         |       |
| Segment  operating income                                |       | 5,364,000        |       | $                                       | 1,858,000  |         | $          | 3,506,000 |   |
| General  corporate expense                               |       | (3,207,000       | )          |                                    |       |         |       |
| Interest expense  – net                             |       | (1,483,000       | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes |       | $                | 674,000    |                                    |       |         |       |   |

 
| Six months ended June, 2006          | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                               | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                    |       | $                | 55,710,000 |                                    | $          | 19,028,000   |       | $ | 36,682,000 |   |
|                                                     |       |             |       |                                    |       |         |       |
| Segment  operating income                                |       | 7,468,000        |       | $                                       | 1,301,000  |         | $          | 6,167,000 |   |
| General corporate  expense                               |       | (2,860,000       | )          |                                    |       |         |       |
| Interest expense  – net                             |       | (1,014,000       | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes |       | $                | 3,594,000  |                                    |       |         |       |   |

 

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**P&F INDUSTRIES, INC. ANDSUBSIDIARIES**

**Item 2.****                                                          ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**General**

The Private SecuritiesLitigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor forforward-looking statements made by or on behalf of P&F Industries, Inc. andsubsidiaries. The Company and its representatives may, from time to time, makewritten or verbal forward-looking statements, including statements contained inthe Company’s filings with the Securities and Exchange Commission and in itsreports to stockholders. Generally, the inclusion of the words “believe,” “expect,”“intend,” “estimate,” “anticipate,” “will,” and their opposites and similarexpressions identify statements that constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 and that are intended to come within thesafe harbor protection provided by those sections. Any forward-looking statements contained herein, including thoserelated to the Company’s future performance, are based upon the Company’shistorical performance and on current plans, estimates and expectations. Allforward-looking statements involve risks and uncertainties. These risks and uncertainties could cause theCompany’s actual results for the 2007 fiscal year and beyond to differmaterially from those expressed in any forward-looking statement made by or onbehalf of the Company for a number of reasons, as previously disclosed inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2006in response to Item 1A. to Part I of Form 10-K. Forward-looking statements speak only as of the date on which they aremade. The Company undertakes no obligation to update publicly or revise anyforward-looking statement, whether as a result of new information, futuredevelopments or otherwise.

**Business**

P&F conducts its business operations through two ofits wholly-owned subsidiaries: Continental Tool Group, Inc. (“Continental”) andCountrywide Hardware, Inc. (“Countrywide”). On June 29, 2007, P&Ftransferred its sole and direct ownership interest in Florida PneumaticManufacturing Corporation (“Florida Pneumatic”) to Continental. P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.

Continental conducts its business operations throughFlorida Pneumatic and Hy-Tech Machine, Inc., a Delaware corporation (“Hy-Tech”).Florida Pneumatic is engaged in the importation, manufacture and sale ofpneumatic hand tools, primarily for the industrial, retail and automotivemarkets, and the importation and sale of compressor air filters. FloridaPneumatic also markets, through its Berkley Tool division (“Berkley”), a lineof pipe cutting and threading tools, wrenches and replacement electricalcomponents for a widely-used brand of pipe cutting and threading machines. Inaddition, through its Franklin Manufacturing (“Franklin”) division, FloridaPneumatic imports a line of door and window hardware. In February 2007, Hy-Tech acquired substantiallyall of the operating assets of Hy-Tech Machine, Inc., a Pennsylvaniacorporation, and Quality Gear & Machine, Inc. and certain real propertyfrom HTM Associates. Hy-Tech is primarily engaged in the manufacture anddistribution of pneumatic tools and parts for industrial applications.

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Countrywide conducts its business operations throughNationwide Industries, Inc. (“Nationwide”), Woodmark International, L.P. (“Woodmark”),a limited partnership between Countrywide and WILP Holdings, Inc., a subsidiaryof P&F, and Pacific Stair Products, Inc. (“Pacific Stair”). Nationwide isan importer and manufacturer of door, window and fencing hardware. Woodmark isan importer of builders’ hardware, including staircase components and kitchen and bath hardware andaccessories. Pacific Stair manufacturespremium stair rail products and distributes Woodmark’s staircase components tothe building industry, primarily in southern California and the southwesternregion of the United States.

TheCompany’s wholly-owned subsidiary, EmbassyIndustries, Inc. (“Embassy”), was engaged in the manufacture and sale ofbaseboard heating products and the importation and sale of radiant heatingsystems until it exited that business in October 2005 through the sale ofsubstantially all of its non-real estate assets. Embassy sold its real estateassets in June 2007. The Company’s wholly-owned subsidiary, GreenManufacturing, Inc. (“Green”), was primarily engaged in the manufacture,development and sale of heavy-duty welded custom designed hydraulic cylinders,a line of access equipment for the petro-chemical industry and a line of posthole digging equipment for the agricultural industry until it exited thosebusinesses between December 2004 and July 2005. The assets and liabilities andresults of operations of Embassy and Green have been segregated and reportedseparately as discontinued operations in the Consolidated Condensed FinancialStatements.

**Overview**

Consolidated revenues for the quarter ended June 30,2007 increased $1,748,000, or 6.1%, from $28,860,000 to $30,608,000. Revenuesincreased approximately $6,220,000, or 65.0%, at Continental, which includesrevenues at Florida Pneumatic and Hy-Tech. Florida Pneumatic reported secondquarter revenues of $11,477,000, increasing approximately $1,912,000. Hy-Techreported second-quarter revenues of $4,308,000. Revenues decreasedapproximately $4,472,000, or 23.2%, at Countrywide, which includes revenues atWoodmark, Pacific Stair and Nationwide. Woodmark had second quarter revenues of$8,509,000, decreasing $3,311,000. Pacific Stair reported second quarterrevenues of $1,031,000, decreasing $660,000. Nationwide reported revenues of$5,282,000, decreasing $501,000. Consolidated gross profit decreased $331,000,or 3.5%, for the second quarter. Consolidated earnings from continuingoperations decreased $1,053,000, or 82.1%, from $1,284,000 to $230,000 for thequarter ended June 30, 2007.

**Critical Accounting Policies and Estimates**

The Company prepares its consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States of America. Certain of these accounting policies require theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure ofcontingent assets and liabilities, revenues and expenses. On an ongoing basis,the Company evaluates estimates, including those related to bad debts,inventory reserves, goodwill and intangible assets and warranty reserves. TheCompany bases its estimates on historical data and experience, when available,and on various other assumptions that are believed to be reasonable under thecircumstances, the combined results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates.

There have been no material changes in the Company’scritical accounting policies and estimates from those discussed in Item 7 ofthe Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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**ACQUISITION**

Results of operations are included in theConsolidated Condensed Financial Statements from the date of acquisition.

Hy-Tech Machine, Inc.

On February 14, 2007, pursuant to an Asset PurchaseAgreement (the “Hy-Tech APA”) effective as of February 12, 2007, Hy-Techacquired substantially all of the assets (the “Hy-Tech Purchased Property”) ofHy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear &Machine, Inc., a Pennsylvania corporation (collectively, the “Hy-Tech Sellers”).The purchase price consisted of $16,900,000 in cash, subject to adjustments,plus the assumption of certain payables and liabilities and the obligation tomake certain contingent payments based on factors described in the Hy-Tech APA.The purchase price was negotiated on the basis of the Hy-Tech Sellershistorical financial performance. The Hy-Tech Purchased Property was used bythe Hy-Tech Sellers in the business of, among other things, manufacturing andselling pneumatic tools and other tool products.

In connection with this acquisition, Hy-Techcontemporaneously entered into an Agreement of Sale with HTM Associates, aPennsylvania general partnership comprised of certain shareholders of the Hy-TechSellers (“HTM”), pursuant to which Hy-Tech purchased certain real propertylocated in Cranberry Township, Pennsylvania from HTM for $2,200,000 in cash.The acquisition of the Hy-Tech Purchased Property and the real property wasfinanced through the Company’s senior credit facility.

Contemporaneously with this acquisition, the Companyexecuted and delivered Amendment No. 7 to Credit Agreement with Citibank andanother bank. The amendment, among other things, adds Continental and Hy-Techas additional co-borrowers and provides for new term loans in amounts not toexceed $19,000,000. The principal on the new term loan notes are payable in 25consecutive quarterly installments of 1/25 of the aggregate principal amountoutstanding on January 31, 2008, commencing on January 31, 2008. From thedate of the amendment through January 31, 2008, monthly payments shall be madeof interest only. The Company and the co-borrowers have the option to payinterest at a rate based on either the fluctuating prime rate, LIBOR or acombination of the two rates. The new term loan notes shall mature on January31, 2014. The amendment also provides for the amendment and restatement ofcertain existing term loan notes. The revolving credit loan facility providesfor a maximum of $18,000,000, with various sublimits, for direct borrowings,letters of credit, bankers’ acceptances and equipment loans.

24

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Thefollowing table summarizes, on an unaudited pro forma basis, the combinedresults of operations of the Company and Hy-Tech as though the acquisitiontransaction had occurred as of January 1, 2006. The pro forma amounts giveeffect to appropriate adjustments for amortization of intangible assets,interest expense and income taxes. The pro forma amounts presented are notnecessarily indicative of either the actual consolidated operating results hadthe acquisition transaction occurred as of January 1, 2006 or of futureconsolidated operating results.
|                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                        |       | $                                | 30,608,000 |                           | $          | 33,340,000 |   | $ | 57,746,000 |   | $ | 64,669,000 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Net earnings                        |       | $                                | 3,260,000  |                           | $          | 1,506,000 |   | $ | 3,568,000 |   | $ | 2,558,000 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share of common stock |       |                             |       |                           |       |   |   |   |   |
| Basic                               |       | $                                | .91        |                           | $          | .42 |   | $ | .99 |   | $ | .71 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Diluted                             |       | $                                | .86        |                           | $          | .39 |   | $ | .94 |   | $ | .67 |   |

 

**DISCONTINUED OPERATIONS**

Embassy Industries, Inc.

Pursuant to an Asset Purchase Agreement (the “EmbassyAPA”), dated as of October 11, 2005, among P&F, Embassy, Mestek, Inc. (“Mestek”)and Embassy Manufacturing, Inc., a wholly-owned subsidiary of Mestek (“EMI”),Embassy sold substantially all of its operating assets to EMI. The assets soldpursuant to the Embassy APA include, among others, machinery and equipment,inventory, accounts receivable and certain intangibles. Certain assets wereretained by Embassy, including, but not limited to, cash and title to any realproperty owned by Embassy at the consummation of the sale to EMI. Embassy has effectively ceased all operatingactivities.

On July 24, 2006, Embassy received a letter (the “PurchaserLetter”) from counsel to J. D’Addario & Company, Inc., a New Yorkcorporation (“Purchaser”), purporting to terminate that certain contractentered into by Embassy and Purchaser on January 13, 2006 (the “Agreement”, andas amended, the “Contract of Sale”). Pursuant to the Contract of Sale, Embassyagreed to sell its Farmingdale, New York premises (the “Farmingdale Premises”)to Purchaser for a purchase price of $6,403,000.

The Purchaser Letter purports to terminate theContract of Sale based upon Purchaser’s assertion that Embassy had notsatisfied certain requirements and demands that the escrow agent return thedownpayment with accrued interest, and that Purchaser be reimbursed for thecosts of survey and title examination.

Embassy informed Purchaser that its purportedtermination of the Contract of Sale was in default of its obligation toconsummate the purchase of the Farmingdale Premises under the terms of theContract of Sale. On August 2, 2006, Purchaser instituted an action againstEmbassy in the Supreme Court of the State of New York, County of Suffolk, forbreach of contract and return of downpayment, seeking $650,000, together withcosts of title and survey and interest thereon, and the cost of the action. Thedownpayment remains in escrow pending resolution of this matter. Embassybelieves the action is without merit and intends to vigorously defend it.

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Embassy entered into a new contract of sale, datedas of February 26, 2007, on the Farmingdale Premises with Tell Realty LLC, anaffiliated entity of Sam Tell & Son, Inc., for a purchase price of $6.3million. Embassy sold the Farmingdale Premises in June 2007 and used theafter-tax proceeds from the sale to satisfy the mortgage on the building of approximately$1.2 million and to reduce its long-term debt. The Company recorded a pre-taxgain from the sale of approximately $5.1 million.

The following amounts related to discontinuedoperations have been segregated from the Company’s continuing operations andare reported as assets held for sale and assets and liabilities of discontinuedoperations in the consolidated condensed balance sheets:
|                                                                   | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Assets held for  sale and assets of discontinued operations:      |       |                        |       |                            |       |
| Current:                                                          |       |                        |       |                            |       |
| Prepaid expenses                                                  |       | $                           | 34,000     |                            | $          | 300,000 |   |
| Assets held for sale                                              |       | —                      |       | 577,000                         |       |
| Subtotal                                                          |       | 34,000                      |       | 877,000                         |       |
| Long-term:                                                        |       |                        |       |                            |       |
| Other receivable                                                  |       | 25,000                      |       | 40,000                          |       |
| Total assets  held for sale and assets of discontinued operations |       | $                           | 59,000     |                            | $          | 917,000 |   |
|                                                              |       |                        |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                        |       |                            |       |
| Current:                                                          |       |                        |       |                            |       |
| Accounts payable and accrued expenses                             |       | $                           | 435,000    |                            | $          | 172,000 |   |
| Mortgage payable                                                  |       | —                      |       | 1,254,000                       |       |
| Subtotal                                                          |       | 435,000                     |       | 1,426,000                       |       |
| Long-term:                                                        |       |                        |       |                            |       |
| Pension obligation                                                |       | 348,000                     |       | 353,000                         |       |
| Total liabilities of  discontinued operations                     |       | $                           | 783,000    |                            | $          | 1,779,000 |   |

 

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**RESULTS OF OPERATIONS**

**Quarters ended June 30, 2007 and 2006**

**Revenues**

Revenues for the quarters ended June 30, 2007 and2006 were approximately as follows:
| Three months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|---------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                    |       | $                | 30,608,000 |                                    | $          | 15,785,000   |       | $ | 14,823,000 |   |
| ** **                                  | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **2006**                                    |       | $                | 28,860,000 |                                    | $          | 9,565,000    |       | $ | 19,295,000 |   |
| ** **                                  | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **%  increase (decrease)**                  |       | 6.1              | %          | 65.0                                    | %          | (23.2        | )%         |

 

Revenues from tools and other products includerevenues from the February 2007 acquisition of Hy-Tech of approximately $4.3million. Revenues from Florida Pneumatic increased approximately $1.9 million.Retail revenues increased by approximately $2.1 million due primarily to newproducts shipped of approximately $1.6 million and an increase in base sales toa significant customer of approximately $1.6 million, partially offset by adecrease in base sales of approximately $835,000 from another significantcustomer and a decrease in certain promotional revenues of approximately$224,000. Other revenue increases of approximately $54,000 in OEM products werepartially offset by decreases in revenue of approximately $37,000 in ourindustrial and catalog businesses, decreases of approximately $60,000 in ourBerkley division, decreases of approximately $65,000 at our Franklin divisionand decreases of approximately $71,000 in our automotive business.

Revenues from hardware decreased at each of ourunits in this group primarily due to softness in the new home constructionmarket that is a principal driver for this group. Woodmark’s revenues decreased$3,311,000, or 28.0%. Revenues from the sale of staircase components decreasedin the second quarter by approximately $2,316,000, or 24.7%, due primarily tosoftness in the new home construction market. Further, revenues in our kitchenand bath products sold into the mobile home and remodeling markets havedecreased approximately $995,000, or 40.7%. Sales to one significant customer,which serves the manufactured housing market, were adversely impacted by marketconditions and sales to another significant customer decreased as they begansourcing products from other vendors. Nationwide’s revenues decreased byapproximately $501,000, or 8.7%, primarily attributable to a slight decrease ofapproximately $79,000, or 2.2%, in sales of fencing products due to marketweakness, a decrease of approximately $69,000, or 5.3%, in OEM products frommarket weakness and the timing of certain customer orders and a decrease ofapproximately $353,000, or 40.7%, in sales of patio products due primarily tomarket weakness, competition and industry consolidation. Pacific Stair’srevenues decreased by approximately $660,000, or 39.0%, primarily attributableto significant softness in the new home construction market in southern Californiaand Arizona.

All revenues are generatedin U.S. dollars and are not impacted by changes in foreign currency exchangerates.

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**Gross Profits**

Gross profits for thequarters ended June 30, 2007 and 2006 were approximately as follows:
| Three months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|---------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                    |       | $                | 9,077,000  |                                    | $          | 4,251,000    |       | $ | 4,826,000 |   |
| ** **                                  |       | 29.7             | %          | 26.9                                    | %          | 32.6         | %          |
| ** **                                  | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **2006**                                    |       | $                | 9,408,000  |                                    | $          | 2,998,000    |       | $ | 6,410,000 |   |
| ** **                                  |       | 32.6             | %          | 31.4                                    | %          | 33.2         | %          |

 

The decrease in the gross profit percentage fromtools and other products was due primarily to a decrease in gross profit marginat Florida Pneumatic as a result of certain price reductions to a significantretail customer and material cost increases of various metals purchased by theFranklin division. This margin decrease was partially offset by certain priceincreases implemented in the industrial and automotive businesses. In addition,this segment’s gross profit margin was favorably impacted by the newly-acquiredHy-Tech, which operates in the industrial tool business at higher margins thanFlorida Pneumatic’s business. The decrease in gross margin percentage fromhardware was due primarily to (a) selling price reductions at Nationwide fromcompetitive pressures and market softness, as well as some cost increases fromAsian suppliers that were not offset by selling price increases, and (b) theadverse impact from the inability to reduce fixed overhead expenses asproduction levels decreased combined with revenue decreases at Pacific Stair.The gross margin percentage decrease was partially offset by a favorableproduct mix at Woodmark as a significant portion of revenue decreases wereassociated with its lower-margin, direct container business.

**Selling, General andAdministrative Expenses**

Consolidated selling, general and administrative (“SG&A”)expenses increased $1,066,000, or 15.8%, from approximately $6,748,000 toapproximately $7,814,000. SG&A expenses include expenses of newly-acquiredHy-Tech in the current period of approximately $851,000. SG&A expenses as apercentage of revenues increased from 23.4% to 25.5%. In addition to Hy-Tech’sexpenses, SG&A expense growth was attributable to an accrual ofapproximately $400,000 for non-recurring compensation related to the sale ofEmbassy’s real estate assets, increased retail market support costs,stock-based compensation from the grant of stock options, and increased netfreight costs as the Company is absorbing a greater percentage of customershipping charges. SG&A expenses were partially offset by approximately$225,000 from the favorable outcome of certain litigation and theimplementation of certain cost reduction measures.

**Interest - Net**

Net interest expense increased $309,000, or 59.2%,from approximately $522,000 to approximately $831,000. Interest expense onborrowings under the term loan facility increased by approximately $261,000 dueto additional borrowings related to the acquisition of Hy-Tech. Interestexpense on borrowings under the Company’s revolving credit loan facilityincreased by approximately $19,000, as higher average borrowings were furtheradversely affected by higher average interest rates. Interest on tradefinancing increased by approximately $23,000 from the timing of certain vendorpurchases.

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**Income Taxes**

The effective tax rates applicable to earnings fromcontinuing operations for the quarters ended June 30, 2007 and 2006 were 46.6%and 39.9%, respectively.

**Six-month periods ended June 30, 2007 and 2006**

**Revenues**

Revenues for the six-month periods ended June 30,2007 and 2006 were approximately as follows:
| Six months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                  |       | $                | 55,567,000 |                                    | $          | 27,398,000   |       | $ | 28,169,000 |   |
| ** **                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **2006**                                  |       | $                | 55,710,000 |                                    | $          | 19,028,000   |       | $ | 36,682,000 |   |
| ** **                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **%  increase (decrease)**                |       | (.3              | )%         | 44.0                                    | %          | (23.2        | )%         |

 

Revenues from tools and other products includerevenues from the February 2007 acquisition of Hy-Tech of approximately $6.5million. Revenues from Florida Pneumatic increased approximately $1.9 million.Retail revenues increased by approximately $2.4 million due primarily to newproducts shipped of approximately $2.6 million, an increase in base sales to asignificant customer of approximately $431,000, partially offset by a decreasein base sales of approximately $632,000 from another significant customer.These revenues were partially offset by decreases in revenue of approximately$129,000 in our industrial and catalog businesses, decreases of approximately$142,000 in our Berkley division, decreases of approximately $134,000 in ourautomotive business and decreases of approximately $43,000 in OEM products.

Revenues from hardware decreased at each of ourunits in this group primarily due to softness in the new home construction marketthat is a principal driver for this group. Woodmark’s revenues decreased$5,772,000, or 25.3%. Revenues from the sale of staircase components decreasedin the first half of the fiscal year by approximately $3,973,000, or 22.1%, dueprimarily to softness in the new home construction market. Further, revenues inour kitchen and bath products sold into the mobile home and remodeling marketshave decreased approximately $1,799,000, or 37.4%. Sales to one significantcustomer, which serves the manufactured housing market, were adversely impactedby market conditions and sales to another significant customer decreased asthey began sourcing products from other vendors. Nationwide’s revenuesdecreased by approximately $1,353,000, or 12.9%, primarily attributable to adecrease of approximately $273,000, or 4.3%, in sales of fencing products dueto market weakness and competition, a decrease of approximately $263,000, or10.6%, in OEM products from market weakness and the timing of certain customerorders and a decrease of approximately $817,000, or 47.1%, in sales of patioproducts due primarily to market weakness, competition and industryconsolidation. Pacific Stair’s revenues decreased by approximately $1,388,000,or 41.3%, primarily attributable to significant softness in the new homeconstruction market in southern California and Arizona.

All revenues are generatedin U.S. dollars and are not impacted by changes in foreign currency exchangerates.

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**Gross Profits**

Gross profits for thesix-month periods ended June 30, 2007 and 2006 were approximately as follows:
| Six months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2007**                                  |       | $                | 16,824,000 |                                    | $          | 7,963,000    |       | $ | 8,861,000 |   |
| ** **                                |       | 30.3             | %          | 29.1                                    | %          | 31.5         | %          |
| ** **                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **2006**                                  |       | $                | 17,656,000 |                                    | $          | 6,063,000    |       | $ | 11,593,000 |   |
| ** **                                |       | 31.7             | %          | 31.9                                    | %          | 31.6         | %          |

 

The decrease in the gross profit percentage fromtools and other products was due primarily to a decrease in gross profit marginat Florida Pneumatic as a result of certain price reductions to a significantretail customer and material cost increases of various metals purchased by theFranklin division. This margin decrease was partially offset by certain priceincreases implemented in the industrial and automotive businesses. In addition,this segment’s gross profit margin was favorably impacted by the newly-acquiredHy-Tech, which operates in the industrial tool business at higher margins thanFlorida Pneumatic’s business. The decrease in gross margin percentage fromhardware was due primarily to (a) selling price reductions at Nationwide fromcompetitive pressures and market softness, as well as some cost increases fromAsian suppliers that were not offset by selling price increases, and (b) theadverse impact from the inability to reduce fixed overhead expenses asproduction levels decreased combined with revenue decreases at Pacific Stair.The gross margin percentage decrease was partially offset by a favorableproduct mix at Woodmark as a significant portion of revenue decreases wereassociated with its lower-margin, direct container business.

**Selling, General andAdministrative Expenses**

Consolidated selling, general and administrative (“SG&A”)expenses increased $1,620,000, or 12.4%, from approximately $13,048,000 toapproximately $14,668,000. SG&A expenses include expenses of newly-acquiredHy-Tech in the current period of approximately $1,289,000. SG&A expenses asa percentage of revenues increased from 23.4% to 26.4%. In addition to Hy-Tech’sexpenses, SG&A expense growth was attributable to an accrual ofapproximately $400,000 for non-recurring compensation related to the sale ofEmbassy’s real estate assets, increased retail market support costs,stock-based compensation from the grant of stock options, and increased netfreight costs as the Company is absorbing a greater percentage of customershipping charges. SG&A expenses were partially offset by approximately$225,000 from the favorable outcome of certain litigation.

**Interest - Net**

Net interest expense increased $469,000, or 46.2%,from approximately $1,014,000 to approximately $1,483,000. Interest expense onborrowings under the term loan facility increased by approximately $397,000 dueto additional borrowings related to the acquisition of Hy-Tech. Interestexpense on borrowings under the Company’s revolving credit loan facilityincreased by approximately $50,000, as higher average borrowings were furtheradversely affected by higher average interest rates.

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**Income Taxes**

The effective tax rates applicable to earnings fromcontinuing operations for the six months ended June 30, 2007 and 2006 were44.1% and 40.0%, respectively.

**LIQUIDITY AND CAPITAL RESOURCES**

The Company’s cash flows from operations can besomewhat cyclical, typically with the greatest demand in the second and thirdquarters followed by positive cash flows in the fourth quarter as receivablesand inventories trend down. Due to its strong asset base, predictable cashflows and favorable banking relationships, the Company believes it has adequateaccess to capital, if and when needed. The Company monitors average days salesoutstanding, inventory turns and capital expenditures to project liquidityneeds and evaluate return on assets employed.

TheCompany gauges its liquidity and financial stability by the measurements shownin the following table (dollar amounts in thousands):
|                           | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $                           | 25,183     |                            | $          | 21,168 |   |
| Current Ratio             |       | 1.85 to 1                   |       | 1.84 to 1                       |       |
| Shareholders’ Equity |       | $                           | 55,380     |                            | $          | 51,521 |   |

 

In connection with the Woodmark acquisitiontransaction in June 2004, the Company is liable for additional payments to thesellers. The amount of these payments, which could be made as of either June30, 2007 or June 30, 2009, are to be based on increases in earnings beforeinterest and taxes, for the year ended on the respective date, over a base of$5,100,000. Woodmark had the option to make a payment as of June 30, 2007 in anamount equal to 48% of this increase, but opted not to make this payment. TheSellers may demand payment as of June 30, 2009 in an amount equal to 40% of theincrease. Any such additional payments will be treated as additions togoodwill.

On June 30, 2004, in conjunction with the Woodmarkacquisition transaction, the Company entered into a credit agreement withCitibank and another bank. This agreement, as amended from time to time,provided the Company with various credit facilities, including revolving creditloans, term loans for acquisitions and a foreign exchange line. The term loanfacility provided a maximum commitment of $34,000,000 to finance acquisitions subject to the approval of the lending banks.There are no commitment fees for any unused portion of this credit facility.The Company borrowed $29,000,000 against this facility to finance the Woodmarkacquisition transaction in June 2004, and there was $13,600,000, includingamounts rolled over from the prior term loan facility, outstanding against theterm loan facility at December 31, 2006.

Contemporaneously with the acquisition of Hy-Tech inFebruary 2007, the Company executed and delivered Amendment No. 7 to CreditAgreement with Citibank and another bank. The amendment, among other things,added Continental Tool Group, Inc. and Hy-Tech Machine, Inc. as additionalco-borrowers and provides for new term loans in amounts not to exceed$19,000,000. The principal on the new term loan notes are payable in 25consecutive quarterly installments of 1¤25 of theaggregate principal amount outstanding on January 31, 2008, commencing onJanuary 31, 2008. From the date of the amendment through January 31, 2008,monthly payments shall be made of interest only. The Company and theco-borrowers have the option to pay interest at a rate based on either thefluctuating prime rate, LIBOR or a combination of the two rates. The new termloan notes shall mature on January 31, 2014. The amendment also provides forthe amendment and restatement of certain existing

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term loan notes. Therevolving credit loan facility provides for a maximum of $18,000,000, withvarious sublimits, for direct borrowings, letters of credit, bankers’acceptances and equipment loans.

At June 30, 2007, there was $5,500,000 outstandingagainst the revolving credit loan facility, and there were no open letters of credit.

The foreign exchange lineprovides for the availability of up to $10,000,000 in foreign currency forwardcontracts. These contracts fix the exchange rate on future purchases ofJapanese yen needed for payments to foreign suppliers. The total amount offoreign currency forward contracts outstanding under the foreign exchange line at June 30, 2007, based on thatday’s closing spot rate, was approximately $459,000.

Under the terms of the Company’scredit agreement, the Company is required to adhere to certain financialcovenants. Management was in full compliance with the financial covenants ofthe credit agreement, as amended in June 2007, on June 30, 2007. The revolvingcredit loan facility under the credit agreement expires in June 2008 and issubject to annual review by the lending banks.

Embassy participated in a multi-employer pensionplan until it sold substantially all of its operating assets in October 2005.This plan provided defined benefits to all of its union workers. Contributionsto this plan were determined by the union contract. The Company does notadminister the plan funds and does not have any control over the plan funds. Asa result of Embassy’s withdrawal from the plan, it has estimated and recorded awithdrawal liability of approximately $369,000, which is payable in quarterlyinstallments of approximately $8,200 from May 2006 through February 2026.

Embassy entered into a contract of sale, dated as ofFebruary 26, 2007, on the Farmingdale Premises with Tell Realty LLC, anaffiliated entity of Sam Tell & Son, Inc., for a purchase price of $6.3million. Embassy sold the Farmingdale Premises in June 2007 and used theafter-tax proceeds from the sale to satisfy the mortgage on the building ofapproximately $1.2 million and to reduce its long-term debt. The Companyreported a pre-tax gain from the sale of approximately $5.1 million.

Cash decreased $166,000 from $1,340,000 as ofDecember 31, 2006 to $1,174,000, as of June 30, 2007. The Company’s debt levelsincreased from $22,619,000 at December 31, 2006 to $37,102,000 at June 30,2007, due primarily to borrowings in connection with the acquisition ofHy-Tech. The Company’s total percent of debt to total book capitalization (debtplus equity) increased from 30.5% at December 31, 2006 to 40.1% at June 30,2007.

Cash provided by operating activities of continuingoperations for the six months periods ended June 30, 2007 and 2006 wasapproximately $3,967,000 and $5,325,000, respectively. The Company believesthat cash on hand derived from operations and cash available through borrowingsunder its credit facilities will be sufficient to allow the Company to meet itsforeseeable working capital needs.

Capital spending was approximately $959,000 and$908,000 for the six months periods ended June 30, 2007 and 2006, respectively,which amounts were provided from working capital. Capital expenditures for thebalance of 2007 are expected to be approximately $400,000, some of which may befinanced through the Company’s credit facilities. Included in the expectedtotal for 2007 are capital expenditures relating to new products, expansion ofexisting product lines and replacement of equipment.

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**OFF-BALANCE SHEET ARRANGEMENTS**

The Company’s foreign exchange line provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of foreign currenciesneeded for payments to foreign suppliers. The Company has not purchased forwardcontracts on New Taiwan dollars. The total amount of foreign currency forwardcontracts outstanding at June 30, 2007, based on that day’s closing spot rate,was approximately $459,000.

The Company, through Florida Pneumatic, importsapproximately 8% of its purchases from Japan, with payment due in Japanese yen.As a result, the Company is subject to the effects of foreign currency exchangefluctuations. The Company uses a variety of techniques to protect itself fromany adverse effects from these fluctuations, including increasing its sellingprices, obtaining price reductions from its overseas suppliers, usingalternative supplier sources and entering into foreign currency forwardcontracts. The decrease in the strength of the Japanese yen and TWD versus theU.S. dollar from 2005 to 2006 had a positive effect on the Company’s results ofoperations and its financial position. During the six months ended June 30,2007, the relative values of the U.S dollar in relation to the Japanese yen,and to a lesser extent the TWD, were above fiscal 2006 averages. There can beno assurance as to the future trend of this value. (See “Item 3 - Quantitativeand Qualitative Disclosures About Market Risk.”)

**NEW ACCOUNTING PRONOUNCEMENTS**

See Note 5 to the Notes to ConsolidatedCondensed Financial Statements included in Item 1 of this report.

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**Item 3.****                                                          ****QuantitativeAnd Qualitative Disclosures About Market Risk**

TheCompany is exposed to market risks, which include changes in U.S. andinternational exchange rates, the prices of certain commodities and currencyrates as measured against the U.S. dollar and each other. The Company attemptsto reduce the risks related to foreign currency fluctuation by utilizingfinancial instruments, pursuant to Company policy.

Thevalue of the U.S. dollar affects the Company’s financial results. Changes inexchange rates may positively or negatively affect the Company’s gross marginsthrough its inventory purchases and operating expenses through realized foreignexchange gains or losses. The Company engages in hedging programs aimed atlimiting, in part, the impact of currency fluctuations. Using primarily forwardexchange contracts, the Company hedges some of those transactions that, whenremeasured according to accounting principles generally accepted in the UnitedStates of America, impact the statement of operations. Factors that couldimpact the effectiveness of the Company’s programs include volatility of thecurrency markets and availability of hedging instruments. All currencycontracts that are entered into by the Company are components of hedging programsand are entered into not for speculation but for the sole purpose of hedging anexisting or anticipated currency exposure. The Company does not buy or sellfinancial instruments for trading purposes. Although the Company maintainsthese programs to reduce the impact of changes in currency exchange rates, whenthe U.S. dollar sustains a weakening exchange rate against currencies in whichthe Company incurs costs, the Company’s costs are adversely affected.

The Company accounts for changes in the fair value of itsforeign currency contracts by marking them to market and recognizing anyresulting gains or losses through its statement of earnings. The Company alsomarks its yen-denominated payables to market, recognizing any resulting gainsor losses in its statement of earnings. At June 30, 2007, the Company hadforeign currency forward contracts, maturing in 2007, to purchase Japanese yenat contracted forward rates. The value of these contracts at June 30, 2007,based on that day’s closing spot rate, was approximately $459,000, which wasthe approximate value of the Company’s yen-denominated accounts payable. Duringthe three-month periods ended June 30, 2007 and 2006, the Company recorded inits cost of sales realized gains (losses) of approximately $(14,000) and$3,000, respectively, on foreign currency transactions. During the six-monthperiods ended June 30, 2007 and 2006, the Company recorded in its cost of salesrealized gains (losses) of approximately $(27,000) and $4,000, respectively, onforeign currency transactions. At June 30, 2007 and 2006, the Company hadunrealized gains of $13,000 and $3,000, respectively, on foreign currencytransactions.

Thepotential loss in value of the Company’s net investment in foreign currencyforward contracts resulting from a hypothetical 10 percent adverse change inforeign currency exchange rates at June 30, 2007 was approximately $53,000.

TheCompany has various debt instruments that bear interest at variable rates tiedto LIBOR (London InterBank Offered Rate). Any increase in LIBOR would have anadverse effect on the Company’s interest costs. In addition to affectingoperating results, adverse changes in interest rates could impact the Company’saccess to capital, certain merger and acquisition strategies and the level ofcapital expenditures.

Thecarrying amounts reported in the consolidated balance sheets for cash and cashequivalents, accounts receivable, accounts payable and short-term debt,approximate fair value as of June 30, 2007 because of the relatively short-termmaturity of these financial instruments. The carrying amounts reported forlong-term debt approximate fair value as of June 30, 2007 because, in general,the interest rates

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underlyingthe instruments fluctuate with market rates.

**Item 4.****                                                          ****Controls and Procedures**

**Evaluation of disclosure controls and procedures**

An evaluation was performed, under the supervisionof, and with the participation of, the Company’s management, including thePrincipal Executive Officer and Principal Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securitiesand Exchange Act of 1934). Based on that evaluation, the Company’s management,including the Principal Executive Officer and Principal Financial Officer,concluded that the Company’s disclosure controls and procedures as of June 30,2007 were effective. Accordingly, management believes that the consolidatedcondensed financial statements included in this Quarterly Report on Form 10-Q,fairly present, in all material respects our financial condition, results ofoperations and cash flows for the periods presented.

P&F management is responsible for establishingand maintaining effective internal controls. Because of its inherentlimitations, internal controls may not prevent or detect misstatements. Acontrol system, no matter how well designed and operated, can only providereasonable, not absolute, assurance that the control system’s objectives will bemet. Also, projections of any evaluation of effectiveness as to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with policies and proceduresmay deteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected.

The Certifications of the Company’s PrincipalExecutive Officer and Principal Financial Officer included as Exhibits 31.1 and31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of suchcertifications, information concerning the Company’s disclosure controls andprocedures and internal control over financial reporting. Such certificationsshould be read in conjunction with the information contained in this Item 4 -Controls and Procedures for a more complete understanding of the matterscovered by such certifications.

**Changes in Internal Control Over Financial Reporting**

There have been no significant changes in theCompany’s internal control over financial reporting during the most recentlycompleted fiscal quarter that has materially affected, or is reasonably likelyto materially affect, the Company’s internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**Item 1.****                   ****LegalProceedings**

The Company is a defendant or co-defendant invarious actions brought about in the ordinary course of conducting itsbusiness. The Company does not believe that any of these actions are materialto the financial condition of the Company.

**Item 1A.****               ****RiskFactors**

There were no materialchanges from risk factors previously disclosed in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2006 in response to Item 1A. toPart I of Form 10-K.

**Item 2.****                   ****UnregisteredSales of Equity Securities and Use of Proceeds**

None.

**Item 3.****                   ****DefaultsUpon Senior Securities**

None.

**Item 4.****                   ****Submissionof Matters to a Vote of Security Holders**

On May 30, 2007, the Registrant held its AnnualMeeting of Stockholders, at which the Election of Directors was voted upon.

The following persons were duly elected to serve,subject to the Company’s Bylaws, as directors of the Registrant until the 2010Annual Meeting of Stockholders, or until the election and qualification oftheir successor(s):
| Name of Director | ** ** | **Votes in favor** | ** ** | **Votes against** | ** ** | **Votes abstained** | ** ** |
|----------------------------|------------|------------------------------|------------|------------------------|------------|--------------------------|------------|
| Richard A.  Horowitz       |       | 3,059,445                    |       | 366,500                |       | 0                        |       |
| Alan I. Goldberg           |       | 2,646,354                    |       | 779,591                |       | 0                        |       |
| Robert M. Steinberg        |       | 3,061,803                    |       | 364,142                |       | 0                        |       |

 

The terms of office of Jeffrey D. Franklin,Robert L. Dubofsky, Sidney Horowitz, Dennis Kalick, Mitchell A. Solomon,Kenneth M. Scheriff and Marc A. Utay as directors of the Registrant continuedafter the Annual Meeting of Stockholders.

There were no broker non-votes pertaining to thisproposal.

**Item 5.****                   ****OtherInformation**

None.

**Item 6.****                   ****Exhibits**

See “Exhibit Index” immediately following thesignature page.

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                        | **P&F INDUSTRIES, INC.**                       |
|------------------------|----------------------------------------------------|
|                   | (Registrant)                                       |
|                   |                                               |
|                   |                                               |
|                   | By                                                 | /s/ Joseph A. Molino, Jr. |   |
|                   | Joseph A. Molino, Jr.                              |
|                   | Chief Financial Officer                            |
| Dated: August 10, 2007 | (Principal Financial and Chief Accounting Officer) |

** **

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**EXHIBIT INDEX**

The following exhibits are either included in this report orincorporated herein by reference as indicated below:
| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **10.1**        |       | Amendment No. 8 to Credit Agreement, dated as of  June 29, 2007, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., Continental Tool Group,  Inc., and Hy-Tech Machine, Inc. as Co-Borrowers, Citibank, N.A., as Administrative  Agent and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report  on Form 8-K dated June 29, 2007). |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **31.1**        |       | Certification of Richard A. Horowitz, Principal  Executive Officer of the Registrant, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **31.2**        |       | Certification of Joseph A. Molino, Jr., Principal  Financial Officer of the Registrant, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **32.1**        |       | Certification of Richard A. Horowitz, Principal  Executive Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **32.2**        |       | Certification of Joseph A. Molino, Jr., Principal  Financial Officer of the Registrant, Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                 |

A copy of any of the foregoing exhibits to thisQuarterly Report on Form 10-Q may be obtained, upon payment of the Registrant’sreasonable expenses in furnishing such exhibit, by writing to P&FIndustries, Inc., 445 Broadhollow Road, Suite 100, Melville New York 11747,Attention: Corporate Secretary.

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