**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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**x****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period Ended March31, 2007**

**o****TRANSITIONREPORT 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   AcceleratedFiler o   Non-AcceleratedFiler x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes  o   No  x

As of May 14, 2007, there were 3,587,160 shares of theregistrant’s Class A Common Stock outstanding.

 

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**P&F INDUSTRIES, INC.**

**FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDED MARCH31, 2007**

**TABLE OF CONTENTS**
| **PART I – FINANCIAL INFORMATION** |                                                                                                                            |   |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                              |                                                                                                                            |   |
| Item 1.                                 | Financial Statements  (unaudited)                                                                                               |   |   |
|                                    |                                                                                                                            |   |   |
|                                    | Consolidated  Condensed Balance Sheets as of March 31, 2007 and December 31, 2006                                     |   |   |
|                                    |                                                                                                                            |   |   |
|                                    | Consolidated  Condensed Statements of Earnings for the three months ended  March 31, 2007 and 2006                    |   |   |
|                                    |                                                                                                                            |   |   |
|                                    | Consolidated  Condensed Statement of Shareholders’ Equity for the period from January 1,  2007 to March 31, 2007 |   |   |
|                                    |                                                                                                                            |   |   |
|                                    | Consolidated  Condensed Statements of Cash Flows for the three months ended March 31, 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 BALANCESHEETS**
| ** **                                      | ** ** | **March 31,  2007** | ** **  | **December 31,  2006**                                 | ** ** |
|-------------------------------------------------|------------|--------------------------|-------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**          | ** **  | **(derived from  audited financial  statements)** | ** ** |
| **ASSETS**                                      |       |                     |        |                                                        |       |
| CURRENT                                         |       |                     |        |                                                        |       |
| Cash and cash  equivalents                      |       | $                        | 803,199     |                                                        | $          | 1,339,882 |   |
| Accounts  receivable – net                 |       | 15,724,437               |        | 12,685,388                                                  |       |
| Notes and other  receivables                    |       | 930,394                  |        | 1,206,600                                                   |       |
| Inventories –  net                         |       | 34,520,769               |        | 26,692,615                                                  |       |
| Deferred income  taxes – net               |       | 980,000                  |        | 980,000                                                     |       |
| Assets held for  sale                           |       | 576,535                  |        | 576,535                                                     |       |
| Assets of  discontinued operations              |       | 272,140                  |        | 300,339                                                     |       |
| Income tax  refund receivable                   |       | 1,338,494                |        | 1,356,310                                                   |       |
| Prepaid expenses  and other current assets      |       | 1,579,661                |        | 1,369,403                                                   |       |
| TOTAL CURRENT  ASSETS                           |       | 56,725,629               |        | 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                        |       | 14,617,779               |        | 9,249,720                                                   |       |
|                                            |       | 23,716,705               |        | 16,140,637                                                  |       |
| Less accumulated  depreciation and amortization |       | 8,724,853                |        | 8,411,447                                                   |       |
| NET PROPERTY AND  EQUIPMENT                     |       | 14,991,852               |        | 7,729,190                                                   |       |
|                                            |       |                     |        |                                                        |       |
| GOODWILL                                        |       | 25,001,438               |        | 24,921,473                                                  |       |
|                                            |       |                     |        |                                                        |       |
| OTHER INTANGIBLE ASSETS  – net             |       | 14,190,963               |        | 10,897,333                                                  |       |
|                                            |       |                     |        |                                                        |       |
| ASSETS OF DISCONTINUED  OPERATIONS              |       | 32,860                   |        | 40,436                                                      |       |
|                                            |       |                     |        |                                                        |       |
| OTHER ASSETS – net                         |       | 445,510                  |        | 311,721                                                     |       |
|                                            |       |                     |        |                                                        |       |
| TOTAL ASSETS                                    |       | $                        | 111,388,252 |                                                        | $          | 90,407,225 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

1

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| ** **                                                                                                                                       | ** ** | **March 31,  2007** | ** **  | **December 31,  2006**                                 | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|-------------------------------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(unaudited)**          | ** **  | **(derived from  audited financial  statements)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                     |       |                     |        |                                                        |       |
| CURRENT LIABILITIES                                                                                                                         |       |                     |        |                                                        |       |
| Short-term  borrowings                                                                                                                           |       | $                        | 8,500,000   |                                                        | $          | 3,000,000 |   |
| Accounts payable                                                                                                                                 |       | 5,993,291                |        | 7,691,869                                                   |       |
| Income taxes  payable                                                                                                                            |       | 369,547                  |        | 435,237                                                     |       |
| Accrued  compensation                                                                                                                            |       | 436,012                  |        | 2,158,279                                                   |       |
| Other accrued  liabilities                                                                                                                       |       | 3,983,380                |        | 3,068,036                                                   |       |
| Current  maturities of long-term debt                                                                                                            |       | 8,331,229                |        | 7,559,681                                                   |       |
| Liabilities of  discontinued operations                                                                                                          |       | 1,313,536                |        | 1,426,222                                                   |       |
| TOTAL CURRENT  LIABILITIES                                                                                                                       |       | 28,926,995               |        | 25,339,324                                                  |       |
|                                                                                                                                             |       |                     |        |                                                        |       |
| LONG-TERM DEBT, less  current maturities                                                                                                         |       | 29,274,784               |        | 12,059,758                                                  |       |
|                                                                                                                                             |       |                     |        |                                                        |       |
| LIABILITIES OF  DISCONTINUED OPERATIONS                                                                                                          |       | 350,382                  |        | 352,971                                                     |       |
|                                                                                                                                             |       |                     |        |                                                        |       |
| DEFERRED INCOME TAXES –  net                                                                                                                |       | 1,134,000                |        | 1,134,000                                                   |       |
| TOTAL  LIABILITIES                                                                                                                               |       | 59,686,161               |        | 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 - 3,859,767 and 3,850,367 shares  at March 31, 2007 and December 31, 2006, respectively |       | 3,859,767                |        | 3,850,367                                                   |       |
| Class B - $1  par; authorized - 2,000,000 shares; no shares issued                                                                               |       | —                   |        | —                                                      |       |
| Additional  paid-in capital                                                                                                                      |       | 9,237,328                |        | 9,191,598                                                   |       |
| Retained  earnings                                                                                                                               |       | 40,976,173               |        | 40,850,384                                                  |       |
| Treasury stock,  at cost - 272,607 shares                                                                                                        |       | (2,371,177               | )           | (2,371,177                                                  | )          |
|                                                                                                                                             |       |                     |        |                                                        |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                 |       | 51,702,091               |        | 51,521,172                                                  |       |
|                                                                                                                                             |       |                     |        |                                                        |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                 |       | $                        | 111,388,252 |                                                        | $          | 90,407,225 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

2

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

**CONSOLIDATED CONDENSED STATEMENTSOF EARNINGS (unaudited)**
| ** **                                                                                                                           | ** ** | **Three months  ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net revenues                                                                                                                         |       | $                                                | 24,958,887 |   | $ | 26,849,503 |   |
| Cost of sales                                                                                                                        |       | 17,211,284                                       |       | 18,602,203 |   |
| Gross profit                                                                                                                         |       | 7,747,603                                        |       | 8,247,300 |   |
| Selling, general  and administrative expenses                                                                                        |       | 6,853,189                                        |       | 6,299,390 |   |
| Operating income                                                                                                                     |       | 894,414                                          |       | 1,947,910 |   |
| Interest expense – net                                                                                                          |       | 651,658                                          |       | 491,954 |   |
| Earnings from  continuing operations before income taxes                                                                             |       | 242,756                                          |       | 1,455,956 |   |
| Income taxes                                                                                                                         |       | 96,000                                           |       | 584,000 |   |
| Earnings from  continuing operations                                                                                                 |       | 146,756                                          |       | 871,956 |   |
|                                                                                                                                 |       |                                             |       |   |   |
| (Loss) earnings from operation of discontinued  operations (net of tax benefit (expense) of $14,000 for 2007 and $(1,000) for  2006) |       | (20,967                                          | )          | 2,045 |   |
|                                                                                                                                 |       |                                             |       |   |   |
| Net earnings                                                                                                                         |       | $                                                | 125,789    |   | $ | 874,001 |   |
|                                                                                                                                 |       |                                             |       |   |   |
| Basic earnings  per common share:                                                                                                    |       |                                             |       |   |   |
| Continuing operations                                                                                                                |       | $                                                | .04        |   | $ | .24 |   |
| Discontinued operations                                                                                                              |       | —                                           |       | — |   |
|                                                                                                                                 |       | $                                                | .04        |   | $ | .24 |   |
|                                                                                                                                 |       |                                             |       |   |   |
| Diluted earnings  (loss) per common share:                                                                                           |       |                                             |       |   |   |
| Continuing operations                                                                                                                |       | $                                                | .04        |   | $ | .23 |   |
| Discontinued operations                                                                                                              |       | (.01                                             | )          | — |   |
|                                                                                                                                 |       | $                                                | .03        |   | $ | .23 |   |
|                                                                                                                                 |       |                                             |       |   |   |
| Weighted average  common shares outstanding:                                                                                         |       |                                             |       |   |   |
| Basic                                                                                                                                |       | 3,581,522                                        |       | 3,583,942 |   |
| Diluted                                                                                                                              |       | 3,802,179                                        |       | 3,832,264 |   |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

3

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

**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                                                     |       | 125,789    |       | —                                                |       | —                  |       | —       |       | 125,789                 |       | — |   | — |   |
| Stock-based  compensation                                        |       | 5,780      |       | —                                                |       | —                  |       | 5,780        |       | —                  |       | — |   | — |   |
| Issuance of  Class A common stock upon exercise of stock options |       | 49,350     |       | 9,400                                                 |       | 9,400                   |       | 39,950       |       | —                  |       | — |   | — |   |
| **Balance, March 31, 2007**                            |       | $          | 51,702,091 |                                                  | 3,859,767  |                    | $          | 3,859,767    |       | $                       | 9,237,328  |   | $ | 40,976,173 |   | (272,607 | ) | $ | (2,371,177 | ) |

 

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

4

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

**CONSOLIDATED CONDENSED STATEMENTSOF CASH FLOWS (unaudited)**
| ** **                                                                                                              | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Cash Flows from  Operating Activities of Continuing Operations:                                                         |       |                                                 |       |   |   |
| Net earnings                                                                                                            |       | $                                                    | 125,789    |   | $ | 874,001 |   |
| Loss (earnings) from discontinued operations – net  of taxes                                                       |       | 20,967                                               |       | (2,045 | ) |
| 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                                                                                           |       | 313,406                                              |       | 226,810 |   |
| Amortization of other intangible assets                                                                                 |       | 365,370                                              |       | 298,624 |   |
| Amortization of other assets                                                                                            |       | 2,631                                                |       | 1,500 |   |
| Provision for (recovery of) losses on accounts  receivable - net                                                        |       | 37,767                                               |       | (8,075 | ) |
| Stock-based compensation                                                                                                |       | 5,780                                                |       | — |   |
| Deferred income taxes – net                                                                                        |       | —                                               |       | (31,000 | ) |
| Changes in  operating assets and liabilities, net of assets and liabilities acquired:                                   |       |                                                 |       |   |   |
| Accounts receivable                                                                                                     |       | 64,600                                               |       | 76,261 |   |
| Notes and other receivables                                                                                             |       | 276,206                                              |       | 812,013 |   |
| Inventories                                                                                                             |       | (553,910                                             | )          | 257,825 |   |
| Prepaid expenses and other current assets                                                                               |       | (138,107                                             | )          | (508,356 | ) |
| Other assets                                                                                                            |       | (41,420                                              | )          | 320,333 |   |
| Accounts payable                                                                                                        |       | (1,698,578                                           | )          | 2,303,470 |   |
| Accruals and other                                                                                                      |       | (1,917,858                                           | )          | (2,186,263 | ) |
| Total adjustments                                                                                                       |       | (3,263,146                                           | )          | 1,561,097 |   |
| Net cash (used in) provided by operating activities  of continuing operations                                           |       | $                                                    | (3,137,357 | ) | $ | 2,435,098 |   |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

5

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

**CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS (unaudited) (continued)**
| ** **                                                                               | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Cash Flows from  Investing Activities of Continuing Operations:                          |       |                                                 |       |   |   |
| Capital expenditures                                                                     |       | $                                                    | (207,097   | ) | $ | (501,206 | ) |
| Purchase of certain assets, net of certain  liabilities, of Hy-Tech Machine, Inc.        |       | (20,627,686                                          | )          | — |   |
| Purchase of certain assets, net of certain  liabilities, of Pacific Stair Products, Inc. |       | —                                               |       | (5,357,737 | ) |
| Net cash used in investing activities of continuing  Operations                          |       | (20,834,783                                          | )          | (5,858,943 | ) |
|                                                                                     |       |                                                 |       |   |   |
| Cash Flows from  Financing Activities of Continuing Operations:                          |       |                                                 |       |   |   |
| Proceeds from short-term borrowings                                                      |       | 6,500,000                                            |       | 9,500,000 |   |
| Repayments of short-term borrowings                                                      |       | (1,000,000                                           | )          | (5,500,000 | ) |
| Proceeds from term loan                                                                  |       | 19,000,000                                           |       | — |   |
| Repayments of term loan                                                                  |       | (950,000                                             | )          | (950,000 | ) |
| Principal payments on long-term debt                                                     |       | (63,426                                              | )          | (63,248 | ) |
| Proceeds from exercise of stock options                                                  |       | 49,350                                               |       | 146,730 |   |
| Purchase of Class A common stock                                                         |       | —                                               |       | (294,196 | ) |
| Net cash provided by financing activities of  continuing operations                      |       | 23,535,924                                           |       | 2,839,286 |   |
|                                                                                     |       |                                                 |       |   |   |
| Cash Flows from  Discontinued Operations:                                                |       |                                                 |       |   |   |
| Net cash used in operating activities                                                    |       | (69,589                                              | )          | (236,454 | ) |
| Net cash (used in) provided by investing activities                                      |       | —                                               |       | — |   |
| Net cash used in financing activities                                                    |       | (30,878                                              | )          | (28,288 | ) |
| Net cash used in discontinued operations                                                 |       | (100,467                                             | )          | (264,742 | ) |
|                                                                                     |       |                                                 |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                               |       | (536,683                                             | )          | (849,301 | ) |
| Cash and cash  equivalents at beginning of period                                        |       | 1,339,882                                            |       | 1,771,624 |   |
| Cash and cash  equivalents at end of period                                              |       | $                                                    | 803,199    |   | $ | 922,323 |   |

 

See accompanying notes to consolidated condensedfinancial statements (unaudited).

6

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**Supplementaldisclosures of cash flow information:**
| Cash paid for: |   |   |    |   |   |
|----------------|--------|--------|---------|--------|--------|
| Interest       |   | $      | 454,000 |   | $      | 478,000 |   |
| Income taxes   |   | $      | 132,000 |   | $      | 1,736,000 |   |

 

Non-cash investing and financing activities wereas follows:

During the three months ended March 31, 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 toconsolidated condensed financial 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 three ofits wholly-owned subsidiaries: Florida Pneumatic Manufacturing Corporation (“FloridaPneumatic”), Continental Tool Group, Inc. (“Continental”) and CountrywideHardware, Inc. (“Countrywide”). P&F and its subsidiaries are hereinreferred to collectively as the “Company.” In addition, the words “we”, “our”and “us” refer to the Company.

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),a line of 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. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”) andthrough Woodmark International, L.P. (“Woodmark”), a limited partnershipbetween Countrywide and WILP Holdings, Inc., a subsidiary of P&F.Nationwide is an importer and manufacturer of door, window and fencinghardware. Woodmark is an importer of builders’ hardware, including staircase components and kitchenand bath hardware and accessories. Throughits Pacific Stair Products, Inc. (“Pacific Stair”) unit, Countrywide alsomanufactures premium stair rail products and distributes Woodmark’sstaircase components to the building industry, primarily in southern Californiaand the southwestern region of the United States. In February 2007, Hy-Tech Machine, Inc., a Delaware corporation (“Hy-Tech”)and wholly-owned subsidiary of Continental, acquired substantially all of the operating assets ofHy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear &Machine, Inc. and certain real property from HTM Associates. Hy-Tech isprimarily engaged in the manufacture and distribution of pneumatic toolsand parts for industrial applications.

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. The Company’s wholly-ownedsubsidiary, Green Manufacturing, Inc. (“Green”), was primarily engaged in themanufacture, development and sale of heavy-duty welded custom designedhydraulic cylinders, a line of access equipment for the petro-chemical industryand a line of post hole digging equipment for the agricultural industry untilit exited those businesses 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 theCompany, these unaudited consolidated condensed financial statements includeall adjustments necessary to present fairly the information set forth therein.All such adjustments are of a normal recurring nature. Results for interimperiods are not necessarily indicative of results to be expected for a fullyear.

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 Financial Accounting Standards Board (“FASB”)issued Interpretation, or FIN, No. 48, “Accounting for Uncertainty in IncomeTaxes”. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with Statementof Financial Accountant Standards (“SFAS”) No. 109, “Accounting for IncomeTaxes”. FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN 48 was effective for fiscalyears beginning after December 15, 2006. The adoption of this statement did nothave a material effect on the Company’s financial position or results ofoperations.

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 Service completed itsexamination of the Company’s Federal tax returns for the years 2003 and 2004and issued a Revenue Agent’s Report that reported no change to the returns asfiled. All examinations of tax years prior to 2003 have been previouslycompleted.

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 liabilities relatedto an uncertain income tax position resulting from the pending state audit byFlorida. The Company does not expect that the completion of these audits wouldresult in any additional assessment that would have a material effect on itsfinancial position or results of operations.

The Company accounts forinterest and penalties related to income tax matters in income tax expense. TheCompany had accrued interest of approximately $165,000 as of December 31, 2006.During the quarter ended March 31, 2007, there were no significant changes tothe amounts recorded as of December 31, 2006.

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 theConsolidated Condensed Financial Statements at December 31, 2006 have beenreclassified to conform to the 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 (loss) per common share reflects the effect of shares of common stockissuable upon the exercise of options, unless the effect on earnings isantidilutive.

Diluted earnings (loss) per common share is computedusing the treasury stock method. Under this method, the aggregate number ofshares of common stock outstanding reflects the assumed use of proceeds fromthe hypothetical exercise of any outstanding options or warrants to purchaseshares of the Company’s Class A Common Stock. The average market value for theperiod is used as the assumed purchase price.

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The following table sets forth the computation of basicand diluted earnings (loss) per common share:
|                                                                                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Numerator:                                                                                                          |       |                                             |       |   |   |
| Numerator for basic and diluted earnings (loss) per  common share:                                                  |       |                                             |       |   |   |
| Earnings from continuing operations                                                                                 |       | $                                                | 147,000    |   | $ | 872,000 |   |
| Discontinued operations, net of taxes                                                                               |       | (21,000                                          | )          | 2,000 |   |
| Net earnings                                                                                                        |       | $                                                | 126,000    |   | $ | 874,000 |   |
|                                                                                                                |       |                                             |       |   |   |
| Denominator:                                                                                                        |       |                                             |       |   |   |
| Denominator for basic earnings per share – weighted  average common shares outstanding                         |       | 3,581,522                                        |       | 3,583,942 |   |
| Effect of dilutive securities:                                                                                      |       |                                             |       |   |   |
| Stock options                                                                                                       |       | 220,657                                          |       | 248,322 |   |
| Denominator for  diluted earnings per share – adjusted weighted average common shares and  assumed conversions |       | 3,802,179                                        |       | 3,832,264 |   |

 

At March 31, 2007 and 2006 and during the three-monthperiods ended March 31, 2007 and 2006, there were outstanding stock optionswhose exercise prices were higher than the average market values of theunderlying Class A Common Stock for the period. These options are anti-dilutiveand are excluded from the computation of earnings per share. The weightedaverage anti-dilutive stock options outstanding were as follows:
|                                                           | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Weighted average anti-dilutive stock options  outstanding |       | 29,500                                           |       | 29,500 |   |

 

**NOTE 3 - STOCK-BASED COMPENSATION**

Stock-basedCompensation

On January 1, 2006, the Company adopted the provisions ofFASB SFAS No. 123(R), “Share-Based Payment” (“Statement 123(R)”), which revisesFASB SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedesAPB Opinion 25, “Accounting for Stock Issued to Employees”. Statement 123(R)requires the Company to recognize expense related to the fair value of ourstock-based compensation awards, including employee stock options.

As a result of adoptingStatement 123(R), the Company’s net earnings for the three-month periods endedMarch 31, 2007 and 2006 were approximately $6,000 and nil lower, respectively,than if we had continued to account for stock-based compensation under APBOpinion 25, “Accounting for Stock Issued toEmployees”. Compensation expense is recognized in the general andadministrative expenses line item of the Company’s statements of earnings on astraight-line basis over the vesting periods. There are no capitalizedstock-based compensation costs at March 31, 2007 and 2006. The adoption ofStatement 123(R) had no material impact on our basic and dilutive earnings percommon share for the three-month periods ended March 31, 2007 and 2006.

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StockOption Plan

The Company’s 2002 Incentive Stock Option Plan (the “CurrentPlan”) authorizes the issuance, to employees and directors, of options topurchase a maximum of 1,100,000 shares of Class A Common Stock. These optionsmust be issued within ten years of the effective date of the Plan and areexercisable for a ten year period from the date of grant, at prices not lessthan 100% of the market value of the Class A Common Stock on the date theoption is granted. Incentive stock options granted to any 10% stockholder areexercisable for a five year period from the date of grant, at prices not lessthan 110% of the market value of the Class A Common Stock on the date theoption is granted. Pursuant to the Current Plan, the Stock Option Committee hasthe discretion to award non-qualified stock option grants. Options typicallyvest immediately. In the event options granted contain a vesting schedule overa period of years, the Company recognizes compensation cost for these awards ona straight-line basis over the service period. The Current Plan, whichterminates in 2012, is the successor to the Company’s 1992 Incentive StockOption Plan (the “Prior Plan”).

The following is a summary of the changes in outstandingoptions for the three months ended March 31, 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                       |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Exercised                     |       | (9,400             | )          | $                                          | 5.25       |                                                                 | —     |                            |       |   |
| Forfeited                     |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Expired                       |       | (6,900             | )          | $                                          | 4.84       |                                                                 | —     |                            |       |   |
| Outstanding,  March 31, 2007  |       | 544,600            |       | $                                          | 7.77       |                                                                 | 3.5        |                            | $          | 2,587,000 |   |
|                          |       |               |       |                                       |       |                                                                 |       |                            |       |
| Vested, March 31, 2007        |       | 517,773            |       | $                                          | 7.68       |                                                                 | 3.6        |                            | $          | 2,505,000 |   |

 

Therewere no stock options granted during the three months ended March 31, 2007 and2006. The total intrinsic value of stock options exercised during the threemonths ended March 31, 2007 and 2006 was $67,000 and $223,000, respectively.

The following is a summary ofchanges in non-vested shares for the three months ended March 31, 2007:

|                                     | ** ** | **Option Shares** | ** ** | **Weighted Average Grant-  Date Fair Value** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------------------------------------------------|------------|
| Non-vested  shares, January 1, 2007 |       | 49,488                 |       | $                                                                | 3.77       |   |
| Granted                             |       | —                 |       | —                                                           |       |
| Vested                              |       | (22,661                | )          | $                                                                | 4.68       |   |
| Forfeited                           |       | —                 |       | —                                                           |       |
| Non-vested shares,  March 31, 2007  |       | 26,827                 |       | $                                                                | 3.00       |   |

 

The Company recognizescompensation 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.

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OtherInformation

As of March 31, 2007, the Company had approximately$24,000 of total unrecognized compensation cost related to non-vested awardsgranted under our share-based plans, which we expect to recognize over aweighted-average period of 1.6 years.

The Company received cash from options exercised duringthe three months ended March 31, 2007 of approximately $49,000. The impact ofthese cash receipts is included in financing activities in the accompanyingconsolidated condensed statements of cash flows. Statement 123(R) requires that cash flowsfrom tax benefits attributable to tax deductions in excess of the compensationcost recognized for those options (excess tax benefits) be classified asfinancing cash flows.

The number of shares of Class A common stock reserved forstock options available for issuance under the Current Plan as of March 31,2007 was 683,400. Of the options outstanding at March 31, 2007, 348,100 wereissued under the Current Plan and 196,500 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 itemattributable to the hedged risk are recognized in earnings in the currentperiod. For derivative instruments that are designated and qualify as a cashflow hedge (i.e., hedging the exposure of variability in the expected futurecash flows that would be attributable to a particular risk), the effectiveportion of the gain or loss on the derivative instrument is reported as a componentof accumulated 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 March 31, 2007 and2006, all of the Company’s derivative instruments are not designated as hedginginstruments.

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 March 31, 2007, the Company hadforeign currency forward contracts, maturing in 2007, to purchase Japanese yenat contracted forward rates. The value of these contracts at March 31, 2007,based on that day’s closing spot rate, was approximately $319,000, which wasthe approximate value of the Company’s yen-denominated accounts payable. Duringthe three-month periods ended March 31, 2007 and 2006, the Company recorded inits cost of sales realized gains of approximately $22,000 and $10,000, respectively,on foreign currency transactions. At March 31, 2007 and 2006, the Company hadno unrealized gains or losses in foreign currency transactions.

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**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.

**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.

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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 Contingent Considerationis to be based on a percentage of the average increase in earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) over a two-yearperiod from the date of acquisition, over a base year EBITDA of $4,473,000. Inaddition, the Company has agreed to make a further additional payment (“AdditionalContingent Consideration”), subject to certain conditions related to anexclusive supply agreement with a major customer and, to a certain extent andsubject to certain provisions, the achievement of Contingent Consideration.This Additional Contingent consideration may not exceed $1,900,000. Any suchadditional payments for Contingent Consideration or Additional ContingentConsideration, if any, would be payable on or about ninety days subsequent tothe second anniversary of the acquisition date and will be treated by theCompany as additions to goodwill.

Contemporaneously with this acquisition, the Companyexecuted and delivered Amendment No. 7 to Credit Agreement with Citibank andanother bank. The amendment, among other things, added 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 $760,000, commencing on January 31, 2008.From the date of the amendment through January 31, 2008, monthly payments shallbe made of interest only. The Company and the co-borrowers have the option topay interest 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 provided for the amendment and restatement ofcertain existing term loan notes. The revolving credit loan facility provides fora maximum of $18,000,000, with various 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                           |   | 732,000    |       |
| Total estimated  purchase price prior to net asset adjustment |   | 19,832,000 |       |
| Estimated net  asset adjustment                               |   | 796,000    |       |
| Total estimated  purchase price                               |   | $          | 20,628,000 |   |

 

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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                         |   |      |   | 7,274,000  |       |
| Other current  assets                    |   |      |   | 55,000     |       |
| 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  |       |
|                                     |   |      |   | 21,593,000 |       |
| Less:  liabilities assumed               |   |      |   | 1,045,000  |       |
| Total fair value  of net assets acquired |   |      |   | 20,548,000 |       |
| Goodwill                                 |   |      |   | 80,000     |       |
| Total estimated  purchase price          |   |      |   | $          | 20,628,000 |   |
|                                          |        |           |        |            |            |        |  |

 

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, interestexpense and income taxes. The pro forma amounts presented are not necessarilyindicative of either the actual consolidated operating results had theacquisition transaction occurred as of January 1, 2006 or of futureconsolidated operating results.
|                                     | ** ** | **Three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net revenues                        |       | $                                | 27,137,000 |   | $ | 31,330,000 |   |
|                                |       |                             |       |   |   |
| Net earnings                        |       | $                                | 409,000    |   | $ | 1,053,000 |   |
|                                |       |                             |       |   |   |
| Earnings per  share of common stock |       |                             |       |   |   |
| Basic                               |       | $                                | .11        |   | $ | .29 |   |
| Diluted                             |       | $                                | .11        |   | $ | .27 |   |

 

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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”,and as amended, the “Contract of Sale”). Pursuant to the Contract of Sale,Embassy agreed to sell its Farmingdale, New York premises (the “FarmingdalePremises”) 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.Embassy believes the action is without merit and intends to vigorously defendit.

Embassy has entered into a new contract of sale,dated as of February 26, 2007, on the Farmingdale Premises with Tell RealtyLLC, an affiliated entity of Sam Tell & Son, Inc., for a purchase price of$6,300,000. The contract is expected to close in the latter part of the Company’ssecond fiscal quarter of 2007. The Company intends to use the net proceeds fromthis sale to satisfy an existing mortgage on the building of approximately $1.2million and to reduce its other debt. The Company expects to report a pre-taxgain from the sale of the building of approximately $5.0 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:

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|                                                                   | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Assets held for  sale and assets of discontinued operations:      |       |                         |       |                            |       |
| Current:                                                          |       |                         |       |                            |       |
| Prepaid expenses                                                  |       | $                            | 272,000    |                            | $          | 300,000 |   |
| Assets held for  sale                                             |       | 577,000                      |       | 577,000                         |       |
| Subtotal                                                          |       | 849,000                      |       | 877,000                         |       |
| Long-term:                                                        |       |                         |       |                            |       |
| Other receivable                                                  |       | 33,000                       |       | 40,000                          |       |
| Total assets  held for sale and assets of discontinued operations |       | $                            | 882,000    |                            | $          | 917,000 |   |
|                                                              |       |                         |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                         |       |                            |       |
| Current:                                                          |       |                         |       |                            |       |
| Accounts payable  and accrued expenses                            |       | $                            | 88,000     |                            | $          | 172,000 |   |
| Mortgage payable                                                  |       | 1,226,000                    |       | 1,254,000                       |       |
| Subtotal                                                          |       | 1,314,000                    |       | 1,426,000                       |       |
| Long-term:                                                        |       |                         |       |                            |       |
| Pension  obligation                                               |       | 350,000                      |       | 353,000                         |       |
| Total liabilities of  discontinued operations                     |       | $                            | 1,664,000  |                            | $          | 1,779,000 |   |

 

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

Accounts receivable -net consists of:

|                                  | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Trade accounts  receivable       |       | $                            | 16,021,000 |                            | $          | 12,908,000 |   |
| Allowance for  doubtful accounts |       | (297,000                     | )          | (223,000                        | )          |
|                             |       | $                            | 15,724,000 |                            | $          | 12,685,000 |   |

 

**NOTE 9 - INVENTORIES**

Inventories- net consist of:

|                                                   | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw material                                      |       | $                            | 2,647,000  |                            | $          | 2,537,000 |   |
| Work in process                                   |       | 1,870,000                    |       | 334,000                         |       |
| Finished goods                                    |       | 33,506,000                   |       | 25,651,000                      |       |
|                                              |       | 38,023,000                   |       | 28,522,000                      |       |
| Reserve for  obsolete and slow-moving inventories |       | (3,502,000                   | )          | (1,829,000                      | )          |
|                                              |       | $                            | 34,521,000 |                            | $          | 26,693,000 |   |

 

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

The changes in the carryingamounts of goodwill for the three months ended March 31, 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   |       | 80,000           |       | 80,000                                        |       | —       |       |
| Balance, March 31, 2007   |       | $                | 25,001,000 |                                          | $          | 2,474,000    |       | $ | 22,527,000 |   |

 

18

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Other intangible assets were as follows:
| ** **                             | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Cost**                     | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible  assets:              |       |                         |       |                            |       |   |   |   |   |
| Customer  relationships                |       | $                            | 14,130,000 |                            | $          | 3,353,000 |   | $ | 10,960,000 |   | $ | 3,055,000 |   |
| Vendor  relationship                   |       | 890,000                      |       | 245,000                         |       | 890,000 |   | 223,000 |   |
| Non-compete and  Employment agreements |       | 810,000                      |       | 760,000                         |       | 810,000 |   | 719,000 |   |
| Trademark/tradename                    |       | 2,339,000                    |       | —                          |       | 2,140,000 |   | — |   |
| Engineering  drawings                  |       | 290,000                      |       | 2,000                           |       | — |   | — |   |
| Licensing                              |       | 105,000                      |       | 13,000                          |       | 105,000 |   | 11,000 |   |
| Total                                  |       | $                            | 18,564,000 |                            | $          | 4,373,000 |   | $ | 14,905,000 |   | $ | 4,008,000 |   |

 

Amortization expense forintangible assets subject to amortization was as follows:
|            | ** ** | **Three months ended March 31,** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|            |       | $                                                    | 365,000    |   | $ | 299,000 |   |
|            |            |                                                      |            |  |  |  |  |

 

Amortization expense foreach of the twelve-month periods ending March 31, 2008 through the twelve-monthperiod ending March 31, 2012, is estimated to be as follows: 2008 - $1,120,000; 2009 - $1,006,000; 2010 -$1,005,000; 2011 - $1,003,000 and 2012 - $996,000. The weighted averageamortization period for intangible assets was 13.2 years at March 31, 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.

Changes in the Company’swarranty liability, included in other accrued liabilities, were as follows:

|                                                                     | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Balance,  beginning of period                                       |       | $                                                    | 368,000    |   | $ | 419,000 |   |
| Warranties issued  and changes in estimated pre-existing warranties |       | 273,000                                              |       | 91,000 |   |
| Actual warranty  costs incurred                                     |       | (264,000                                             | )          | (96,000 | ) |
| Balance, end of period                                              |       | $                                                    | 377,000    |   | $ | 414,000 |   |

 

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**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 March 31, 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 March 31, 2007 | ** ** | **Consolidated** | ** **  | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|------------------------------------------------------------|------------|------------------|-------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                 | ** ** | ** **       | ** **  | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                      |       | $                | 24,959,000  |                                    | $          | 11,613,000   |       | $ | 13,346,000 |   |
|                                                       |       |             |        |                                    |       |         |       |
| Segment  operating income                                  |       | 2,037,000        |        | $                                       | 857,000    |         | $          | 1,180,000 |   |
| General  corporate expense                                 |       | (1,142,000       | )           |                                    |       |         |       |
| Interest expense  – net                               |       | (652,000         | )           |                                    |       |         |       |
| Earnings from  continuing operations before income taxes   |       | $                | 243,000     |                                    |       |         |       |   |
|                                                       |       |             |        |                                    |       |         |       |
| Segment assets                                             |       | $                | 106,814,000 |                                    | $          | 47,607,000   |       | $ | 59,207,000 |   |
| Corporate assets  and assets of discontinued operations    |       | 4,574,000        |        |                                    |       |         |       |
| Total assets                                               |       | $                | 111,388,000 |                                    |       |         |       |   |

 

 
| Three months ended March 31, 2006 | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                 | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                      |       | $                | 26,850,000 |                                    | $          | 9,463,000    |       | $ | 17,387,000 |   |
|                                                       |       |             |       |                                    |       |         |       |
| Segment  operating income                                  |       | 3,418,000        |       | $                                       | 710,000    |         | $          | 2,708,000 |   |
| General  corporate expense                                 |       | (1,470,000       | )          |                                    |       |         |       |
| Interest expense  – net                               |       | (492,000         | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes   |       | $                | 1,456,000  |                                    |       |         |       |   |
|                                                       |       |             |       |                                    |       |         |       |
| Segment assets                                             |       | $                | 85,464,000 |                                    | $          | 26,169,000   |       | $ | 59,295,000 |   |
| Corporate assets  and assets of discontinued operations    |       | 4,899,000        |       |                                    |       |         |       |
| Total assets                                               |       | $                | 90,363,000 |                                    |       |         |       |   |

 

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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 three ofits wholly-owned subsidiaries: Florida Pneumatic ManufacturingCorporation (“Florida Pneumatic”), Continental Tool Group, Inc. (“Continental”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and its subsidiaries areherein referred to collectively as the “Company.” In addition, the words “we”, “our”and “us” refer to the Company.

Florida Pneumatic is engaged in the importation,manufacture and sale of pneumatic hand tools, primarily for the industrial,retail and automotive markets, and the importation and sale of compressor airfilters. Florida Pneumatic also markets, through its Berkley Tool division (“Berkley”),a line of 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. Countrywide conducts itsbusiness operations through Nationwide Industries, Inc. (“Nationwide”) andthrough Woodmark International, L.P. (“Woodmark”), a limited partnershipbetween Countrywide and WILP Holdings, Inc., a subsidiary of P&F.Nationwide is an importer and manufacturer of door, window and fencinghardware. Woodmark is an importer of builders’ hardware, including staircase components and kitchenand bath hardware and accessories. Throughits Pacific Stair Products, Inc. (“Pacific Stair”) unit, Countrywide alsomanufactures premium stair rail products and distributes Woodmark’sstaircase components to the building industry, primarily in southern Californiaand the southwestern region of the United States. In February 2007, Hy-Tech Machine, Inc., a Delaware corporation (“Hy-Tech”)and wholly-owned subsidiary of Continental, acquired substantially all of the operating assets ofHy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear &Machine, Inc. and certain real property from HTM Associates. Hy-Tech isprimarily 

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engaged in the manufactureand distribution of pneumatic tools and parts for industrial applications.

The Company’s wholly-ownedsubsidiary, Embassy Industries, Inc. (“Embassy”),was engaged in the manufacture and sale of baseboard heating products and theimportation and sale of radiant heating systems until it exited that businessin October 2005 through the sale of substantially all of its non-real estateassets. The Company’s wholly-owned subsidiary, Green Manufacturing, Inc. (“Green”),was primarily engaged in the manufacture, development and sale of heavy-dutywelded custom designed hydraulic cylinders, a line of access equipment for thepetro-chemical industry and a line of post hole digging equipment for theagricultural industry until it exited those businesses between December 2004and July 2005. The assets and liabilities and results of operations of Embassyand Green have been segregated and reported separately as discontinuedoperations in the Consolidated Condensed Financial Statements.

**Overview**

Consolidated revenues for the quarter ended March31, 2007 decreased $1,891,000, or 7.0%, from $26,850,000 to $24,959,000.Revenues decreased approximately $4,041,000, or 23.2%, at Countrywide, whichincludes revenues at Woodmark, Pacific Stair and Nationwide. Woodmark had firstquarter revenues of $8,516,000, decreasing $2,461,000. Pacific Stair reportedfirst quarter revenues of $939,000, decreasing $727,000. Nationwide reportedrevenues of $3,891,000, decreasing $851,000. Revenues at Florida Pneumatic forthe first quarter were essentially flat at $9,435,000. Hy-Tech reportedrevenues of $2,178,000 since the Company’s acquisition of certain assetseffective February 12, 2007. Consolidated gross profit decreased $499,000, or6.1%, for the first quarter primarily due to the decrease in revenues.Consolidated earnings from continuing operations decreased $725,000, or 83.2%,from $872,000 to $147,000 for the quarter ended March 31, 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-Tech acquired substantially all of the assets (the “Hy-Tech PurchasedProperty”) of Hy-Tech Machine, Inc., a Pennsylvania corporation, and QualityGear & Machine, Inc., a Pennsylvania corporation (collectively, the “Hy-TechSellers”). The purchase price consisted of $16,900,000 in cash, subject toadjustments, plus the assumption of certain payables and liabilities and theobligation to make certain contingent payments based on factors described inthe Hy-Tech APA. The purchase price was negotiated on the basis of the Hy-TechSellers historical financial performance. The Hy-Tech Purchased Property wasused by the Hy-Tech Sellers in the business of, among other things,manufacturing and selling 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 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.

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 $760,000, commencing on January 31, 2008.From the date of the amendment through January 31, 2008, monthly payments shallbe made of interest only. The Company and the co-borrowers have the option topay interest 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.

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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, interestexpense and income taxes. The pro forma amounts presented are not necessarilyindicative of either the actual consolidated operating results had theacquisition transaction occurred as of January 1, 2006 or of futureconsolidated operating results.
|                                     | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net revenues                        |       | $                                                | 27,137,000 |   | $ | 31,330,000 |   |
|                                |       |                                             |       |   |   |
| Net earnings                        |       | $                                                | 409,000    |   | $ | 1,053,000 |   |
|                                |       |                                             |       |   |   |
| Earnings per  share of common stock |       |                                             |       |   |   |
| Basic                               |       | $                                                | .11        |   | $ | .29 |   |
| Diluted                             |       | $                                                | .11        |   | $ | .27 |   |

 

**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”, and as amended, the “Contractof Sale”). Pursuant to the Contract of Sale, Embassy agreed to sell itsFarmingdale, New York premises (the “Farmingdale Premises”) to Purchaser for apurchase 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 it’s 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 actionagainst Embassy in the Supreme Court of the State of New York, County ofSuffolk, for breach of contract and return of downpayment, seeking $650,000,together with costs of title and survey and interest thereon, and the cost ofthe action. Embassy believes the action is without merit and intends tovigorously defend it.

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Embassy has entered into a new contract of sale,dated as of February 26, 2007, on the Farmingdale Premises with Tell RealtyLLC, an affiliated entity of Sam Tell & Son, Inc., for a purchase price of$6,300,000. The contract is expected to close in the latter part of the Company’ssecond fiscal quarter of 2007. The Company intends to use the net proceeds fromthis sale to satisfy an existing mortgage on the building of approximately $1.2million and to reduce its other debt. The Company expects to report a pre-taxgain from the sale of the building of approximately $5.0 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:
|                                                                   | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Assets held for  sale and assets of discontinued operations:      |       |                         |       |                            |       |
| Current:                                                          |       |                         |       |                            |       |
| Prepaid expenses                                                  |       | $                            | 272,000    |                            | $          | 300,000 |   |
| Assets held for sale                                              |       | 577,000                      |       | 577,000                         |       |
| Subtotal                                                          |       | 849,000                      |       | 877,000                         |       |
| Long-term:                                                        |       |                         |       |                            |       |
| Other receivable                                                  |       | 33,000                       |       | 40,000                          |       |
| Total assets  held for sale and assets of discontinued operations |       | $                            | 882,000    |                            | $          | 917,000 |   |
|                                                              |       |                         |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                         |       |                            |       |
| Current:                                                          |       |                         |       |                            |       |
| Accounts payable and accrued expenses                             |       | $                            | 88,000     |                            | $          | 172,000 |   |
| Mortgage payable                                                  |       | 1,226,000                    |       | 1,254,000                       |       |
| Subtotal                                                          |       | 1,314,000                    |       | 1,426,000                       |       |
| Long-term:                                                        |       |                         |       |                            |       |
| Pension obligation                                                |       | 350,000                      |       | 353,000                         |       |
| Total liabilities of  discontinued operations                     |       | $                            | 1,664,000  |                            | $          | 1,779,000 |   |

 

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**RESULTS OF OPERATIONS**

**Quarters ended March 31, 2007 and 2006**

**Revenues**

Revenues for the quartersended March 31, 2007 and 2006 were approximately as follows:

| Three months ended  March 31, | ** ** | **Consolidated** | ** ** | **Tools and   other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------|------------|------------------|------------|-----------------------------------------------|------------|--------------|------------|
| **2007**                                     |       | $                | 24,959,000 |                                          | $          | 11,613,000   |       | $ | 13,346,000 |   |
| ** **                                   | ** ** | ** **       | ** ** | ** **                                    | ** ** | ** **   | ** ** |
| **2006**                                     |       | $                | 26,850,000 |                                          | $          | 9,463,000    |       | $ | 17,387,000 |   |
| ** **                                   | ** ** | ** **       | ** ** | ** **                                    | ** ** | ** **   | ** ** |
| **% increase (decrease)**                    |       | (7.0             | )%         | 22.7                                          | %          | (23.2        | )%         |

 

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$2,461,000, or 22.4%. Revenues from the sale of staircase components decreasedin the first quarter by approximately $1,682,000, or 19.5%, 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 $779,000, or 32.9%, as sales to two significantcustomers, one of which serves the manufactured housing market, have beenadversely impacted by market conditions. Nationwide’s revenues decreased byapproximately $851,000, or 17.9%, primarily attributable to a decrease ofapproximately $194,000 in sales of fencing products due to market weakness andcompetition, a decrease of approximately $194,000 in OEM products from marketweakness and the timing of certain customer orders and a decrease ofapproximately $463,000 in sales of patio products due primarily to marketweakness and an uneventful hurricane season. Pacific Stair’s revenues decreasedby approximately $727,000, or 43.7%, primarily attributable to significantsoftness in the new home construction market in the southern California region.

Revenues from tools and other products includerevenues from the newly-acquired Hy-Tech in this quarter of approximately $2.2million. Revenues from Florida Pneumatic were essentially flat. Retail revenuesincreased by approximately $253,000 due primarily to new products shipped ofapproximately $954,000, an increase in base sales to a significant customer ofapproximately $203,000, an increase in certain promotional revenues ofapproximately $224,000, partially offset by a decrease in base sales ofapproximately $1.1 million from another significant customer. Other revenueincreases of approximately $70,000 at our Franklin division were partiallyoffset by decreases in revenue of approximately $140,000 in our catalogbusiness, decreases of approximately $82,000 in our Berkley division, decreasesof approximately $97,000 in OEM products and decreases of approximately $62,000in our automotive business.

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 March 31, 2007 and 2006 were approximately as follows:
| Three months ended  March 31, | ** ** | **Consolidated** | ** ** | **Tools and   other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------|------------|------------------|------------|-----------------------------------------------|------------|--------------|------------|
| **2007**                                     |       | $                | 7,748,000  |                                          | $          | 3,713,000    |       | $ | 4,035,000 |   |
| ** **                                   |       | 31.0             | %          | 32.0                                          | %          | 30.2         | %          |
| ** **                                   | ** ** | ** **       | ** ** | ** **                                    | ** ** | ** **   | ** ** |
| **2006**                                     |       | $                | 8,247,000  |                                          | $          | 3,064,000    |       | $ | 5,183,000 |   |
| ** **                                   |       | 30.7             | %          | 32.4                                          | %          | 29.8         | %          |

 

The increase in the gross profit percentage fromhardware was due primarily to a favorable product mix in its Kitchen and Bathdivision due to selling price increases and the effect of lower sales to asignificant, but low-margin, customer. These gross margin percentage increaseswere partially offset by (a) selling price reductions at Nationwide due tocompetitive pressures and market softness, as well as some cost increases fromAsian suppliers that were not fully offset by overall selling price increases,(b) the adverse impact from fixed overhead expenses resulting from lowerproduction and revenue decreases at Pacific Stair, and (c) competitivepricing pressures on stair products in several markets served by Woodmark. Thedecrease in the gross profit percentage from tools and other products was dueprimarily to a decrease in gross profit margin at Florida Pneumatic as a resultof certain price reductions to a significant retail customer and material costincreases of various metals purchased by the Franklin division. This margindecrease was partially offset by certain price increases implemented in theindustrial and automotive businesses. In addition, this segment’s gross profitmargin was favorably impacted by the newly-acquired Hy-Tech, which operates inthe industrial tool business at higher margins than Florida Pneumatic’sbusiness.

**Selling, General and Administrative Expenses**

Consolidated selling, general and administrative (“SG&A”)expenses increased $554,000, or 8.8%, from approximately $6,299,000 toapproximately $6,853,000. SG&A expenses include expenses of newly-acquiredHy-Tech in the current period of approximately $438,000. SG&A expenses as apercentage of revenues increased from 23.5% to 27.5% primarily due to thedecrease in sales. SG&A expense growth was also driven by other factors, includingincreased retail market support costs, increased net freight costs as theCompany is absorbing a greater percentage of customer shipping charges, and themix of commissionable sales versus non-commissionable sales.

**Interest - Net**

Net interest expense increased $160,000, or 32.5%,from approximately $492,000 to approximately $652,000. Interest expense onborrowings under the term loan facility increased by approximately $136,000 dueto additional borrowings related to the acquisition of Hy-Tech. Interest expenseon borrowings under the Company’s revolving credit loan facility increased byapproximately $31,000, as higher average borrowings were further adverselyaffected by higher average interest rates.

**Income Taxes**

The effective tax rates applicable to earnings fromcontinuing operations for the quarters ended

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March 31, 2007 and 2006 were 39.5% and 40.1%, 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):
|                           | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $                            | 27,799     |                            | $          | 21,168 |   |
| Current Ratio             |       | 1.96 to 1                    |       | 1.84 to 1                       |       |
| Shareholders’ Equity |       | $                            | 51,702     |                            | $          | 51,521 |   |

 

In connection with theWoodmark acquisition transaction in June 2004, the Company is liable foradditional payments to the sellers. The amount of these payments, which wouldbe made as of either June 30, 2007 or June 30, 2009, are to be based onincreases in earnings before interest and taxes, for the year ended on therespective date, over a base of $5,100,000. Woodmark has the option to make apayment as of June 30, 2007 in an amount equal to 48% of this increase. IfWoodmark does not make this payment as of June 30, 2007, the Sellers may demandpayment as of June 30, 2009 in an amount equal to 40% of the increase. Any suchadditional payments will be treated as additions to goodwill.

On June 30, 2004, inconjunction with the Woodmark acquisition transaction, the Company entered intoa credit agreement with Citibank and another bank. This agreement, as amendedfrom time to time, provided the Company with various credit facilities,including revolving credit loans, term loans for acquisitions and a foreign exchangeline. The term loan facility provided a maximum commitment of $34,000,000 tofinance acquisitions subject to the approvalof the lending banks. There are no commitment fees for any unusedportion of this credit facility. The Company borrowed $29,000,000 against thisfacility to finance the Woodmark acquisition transaction in June 2004, andthere was $13,600,000, including amounts rolled over from the prior term loanfacility, outstanding against the term loan facility at December 31, 2007.

Contemporaneously with theacquisition of Hy-Tech in February 2007, the Company executed and deliveredAmendment No. 7 to Credit Agreement with Citibank and another bank. Theamendment, among other things, added Continental Tool Group, Inc. and Hy-TechMachine, Inc. as additional co-borrowers and provides for new term loans inamounts not to exceed $19,000,000. The principal on the new term loan notes arepayable in 25 consecutive quarterly installments of $760,000, 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 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.

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In connection with the acquisition of certain assetsof Hy-Tech in February 2007, the Company has recorded a liability at March 31,2007 of approximately $796,000 representing the estimated adjustment to thepurchase price pursuant to the terms of the asset purchase agreement that isexpected to be payable in the second quarter of 2007.

At March 31, 2007, there was$8,500,000 outstanding against 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 March 31, 2007,based on that day’s closing spot rate, was approximately $319,000.

Underthe terms of the Company’s credit agreement, the Company is required to adhereto certain financial covenants. Management was in full compliance with thefinancial covenants of the credit agreement, as amended in February 2007,on March 31, 2007. The revolving credit loan facility under thecredit agreement expires in June 2007 and is subject to annual review by thelending banks.

In connection with the saleof certain assets of Embassy in October 2005, the Company recorded a receivableof approximately $1,233,000, comprised of a working capital adjustment ofapproximately $433,000 and approximately $800,000 of escrow monies due, subjectto certain conditions of release. In January 2006, the Company receivedapproximately $833,000 in cash relating to the working capital adjustment and apartial release of escrow monies. The balance of the escrow monies due areexpected to be paid to the Company in June 2007.

Embassy participated in amulti-employer pension plan until it sold substantially all of its operatingassets in October 2005. This plan provided defined benefits to all of its unionworkers. Contributions to this plan were determined by the union contract. TheCompany does not administer the plan funds and does not have any control overthe plan funds. As a result of Embassy’s withdrawal from the plan, it hasestimated and recorded a withdrawal liability of approximately $279,000, whichis payable in quarterly installments of approximately $8,200 from May 2006through February 2026.

Embassy has entered into acontract of sale, dated as of February 26, 2007, on the Farmingdale Premiseswith Tell Realty LLC, an affiliated entity of Sam Tell & Son, Inc., for apurchase price of $6,300,000. The contract is expected to close in the latterpart of the Company’s second fiscal quarter of 2007. The Company intends to usethe net proceeds from this sale to satisfy an existing mortgage on the buildingof approximately $1.2 million and to reduce its other debt. The Company expectsto report a pre-tax gain from the sale of the building of approximately $5.0million.

Cash decreased $537,000 from$1,340,000 as of December 31, 2006 to $803,000, as of March 31, 2007. TheCompany’s debt levels increased from $19,619,000 at December 31, 2006 to$37,606,000 at March 31, 2007, due primarily to borrowings in connection withthe acquisition of Hy-Tech. The Company’s total percent of debt to total bookcapitalization (debt plus equity) increased from 30.5% at December 31, 2006 to47.1% at March 31, 2007.

Cash (used in) provided byoperating activities of continuing operations for the three months periodsended March 31, 2007 and 2006 was approximately $(3,137,000) and $2,435,000,respectively. The Company believes that cash on hand derived from operationsand cash available through borrowings 

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under its credit facilities will be sufficient to allow the Company tomeet its foreseeable working capital needs.

Capital spending wasapproximately $207,000 and $501,000 for the three months periods endedMarch 31, 2007 and 2006, respectively, which amounts were providedfrom working capital. Capital expenditures for the balance of 2007 are expectedto be approximately $1,100,000, some of which may be financed through theCompany’s credit facilities. Included in the expected total for 2007 arecapital expenditures relating to new products, expansion of existing productlines and replacement of equipment.

**OFF-BALANCE SHEET ARRANGEMENTS**

The Company’s foreignexchange line provides for the availability of up to $10,000,000 in foreigncurrency forward contracts. These contracts fix the exchange rate on futurepurchases of foreign currencies needed for payments to foreign suppliers. TheCompany has not purchased forward contracts on New Taiwan dollars. The totalamount of foreign currency forward contracts outstanding at March 31, 2007,based on that day’s closing spot rate, was approximately $319,000.

The Company, through FloridaPneumatic, imports 16% of its purchases from Japan, with payment due inJapanese yen. As a result, the Company is subject to the effects of foreigncurrency exchange fluctuations. The Company uses a variety of techniques toprotect itself from any adverse effects from these fluctuations, includingincreasing its selling prices, obtaining price reductions from its overseassuppliers, using alternative supplier sources and entering into foreigncurrency forward contracts. The decrease in the strength of the Japanese yenand TWD versus the U.S. dollar from 2005 to 2006 had a positive effect on theCompany’s results of operations and its financial position. During the threemonths ended March 31, 2007, the relative values of the U.S dollar in relationto the Japanese yen, and to a lesser extent the TWD, were above fiscal 2006averages. There can be no assurance as to the future trend of this value. (See “Item3 - Quantitative and Qualitative Disclosures About Market Risk.”)

**NEW ACCOUNTING PRONOUNCEMENTS**

See Note 5 to the Notes to Consolidated CondensedFinancial Statements included in Item 1 of this report.

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

**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 hedgingprograms and are entered into not for speculation but for the sole purpose ofhedging an existing or anticipated currency exposure. The Company does not buyor sell financial instruments for trading purposes. Although the Companymaintains these programs to reduce the impact of changes in currency exchangerates, when the U.S. dollar sustains a weakening exchange rate againstcurrencies in which the Company incurs costs, the Company’s costs are adverselyaffected.

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 March 31, 2007, theCompany had foreign currency forward contracts, maturing in 2007, to purchaseJapanese yen at contracted forward rates. The value of these contracts atMarch 31, 2007, based on that day’s closing spot rate, wasapproximately $319,000, which was the approximate value of the Company’syen-denominated accounts payable. During the three-month periods ended March 31, 2007and 2006, the Company recorded in its cost of sales realized gains ofapproximately $22,000 and $10,000, respectively, on foreign currencytransactions. At March 31, 2007 and 2006, the Company had nounrealized gains or losses in foreign currency transactions.

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 March 31, 2007 was approximately$36,000.

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 March 31, 2007 because of the relativelyshort-term maturity of these financial instruments. The carrying amountsreported for long-term debt approximate fair value as of March 31, 2007because, in general, the interest rates underlying the instruments fluctuatewith market rates.

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**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 ofMarch 31, 2007 were effective. Accordingly, management believes thatthe consolidated condensed financial statements included in this QuarterlyReport on Form 10-Q, fairly present, in all material respects our financialcondition, results of operations 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 willbe met. Also, projections of any evaluation of effectiveness as to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with policies andprocedures may 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.**   | ** ** | **Legal Proceedings**                                                                                                                                                                                                                            |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |       | The Company is a defendant or co-defendant in  various actions brought about in the ordinary course of conducting its  business. The Company does not believe that any of these actions are material  to the financial condition of the Company. |
| ** **    | ** ** | ** **                                                                                                                                                                                                                                       |
| **Item  1A.** | ** ** | **Risk Factors**                                                                                                                                                                                                                                 |
|          |       | There were no material changes from risk factors  previously disclosed in the Company’s Annual Report on Form 10-K for the year  ended December 31, 2006 in response to Item 1A. to Part I of Form 10-K.                                    |
| ** **    | ** ** | ** **                                                                                                                                                                                                                                       |
| **Item 2.**   | ** ** | **Unregistered Sales of Equity Securities and Use  of Proceeds**                                                                                                                                                                                 |
|          |       | None.                                                                                                                                                                                                                                            |
| ** **    | ** ** | ** **                                                                                                                                                                                                                                       |
| **Item 3.**   | ** ** | **Defaults Upon Senior Securities**                                                                                                                                                                                                              |
|          |       | None.                                                                                                                                                                                                                                            |
| ** **    | ** ** | ** **                                                                                                                                                                                                                                       |
| **Item 4.**   | ** ** | **Submission of Matters to a Vote of Security  Holders**                                                                                                                                                                                         |
|          |       | None.                                                                                                                                                                                                                                            |
| ** **    | ** ** | ** **                                                                                                                                                                                                                                       |
| **Item 5.**   | ** ** | **Other Information**                                                                                                                                                                                                                            |
|          |       | None.                                                                                                                                                                                                                                            |
| ** **    | ** ** | ** **                                                                                                                                                                                                                                       |
| **Item 6.**   | ** ** | **Exhibits**                                                                                                                                                                                                                                     |
|          |       | See “Exhibit Index” immediately following the  signature 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: May 14,  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**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **2.1**         |       | Asset Purchase Agreement, effective as of February  12, 2007, Hy-Tech Machine, Inc., a Delaware corporation, Hy-Tech Machine,  Inc., a Pennsylvania corporation, Quality Gear and Machine, Inc. and HTM  Associates (Incorporated by reference to  Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated February 14,  2007). Pursuant to Item 601(b)(2)  of Regulation S-K, the Registrant agrees to furnish, supplementally, a copy of  any exhibit or schedule omitted from the Asset Purchase Agreement to the  Commission upon request. |
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **2.2**         |       | Agreement of Sale, effective as of February 12,  2007, Hy-Tech Machine, Inc., and HTM Associates (Incorporated by reference to  Exhibit 2.2 to the Registrant’s Current Report on Form 8-K dated February 14,  2007).                                                                                                                                                                                                                                                                                                                                   |
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **10.1**        |       | Executive Employment Agreement, dated February 12,  2007, among the Registrant and Richard A. Horowitz (Incorporated by reference  to Exhibit 10.1 to the Registrant’s  Current Report on Form 8-K dated February 12, 2007).                                                                                                                                                                                                                                                                                                                            |
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **10.2**        |       | Contract of Sale, dated February 26, 2007, between  the Registrant and Tell Realty LLC (Incorporated by reference to Exhibit 10.1  to the Registrant’s Current Report on  Form 8-K dated February 27, 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 this Quarterly Report onForm 10-Q may be obtained, upon payment of the Registrant’s reasonable expensesin furnishing such exhibit, by writing to P&F Industries, Inc., 445Broadhollow Road, Suite 100, Melville New York 11747, Attention: CorporateSecretary.

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