**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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**xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly PeriodEnded June 30, 2006**

**oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from           to           **

**Commission File Number 1 - 5332**

**P&F INDUSTRIES, INC.**

(Exactname of registrant as specified in its charter)

| **Delaware**                     |   | **22-1657413**                           |
|----------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification Number) |
| incorporation or  organization)  |   |                                     |

**445 Broadhollow Road, Suite 100, Melville, New York  11747**

(Addressof principal executive offices)                               (ZipCode)

Registrant’stelephone number, including area code: **(631)694-9800**

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

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

LargeAccelerated Filer o  Accelerated Filer  o  Non-Accelerated Filer  x

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

As ofAugust 11, 2006, there were 3,577,760 shares of the registrant’s Class A CommonStock outstanding.

 

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**P&F INDUSTRIES, INC.**

**FORM 10-Q**

**FOR THE QUARTERLY PERIOD ENDED JUNE 30,2006**

**TABLE OF CONTENTS**
| **PART I – FINANCIAL  INFORMATION** |                                                                                                                 |
|------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
| ** **                               | ** **                                                                                                           |
| Item 1.                                  | Financial  Statements (unaudited)                                                                                    |   |
|                                     |                                                                                                                 |   |
|                                     | Consolidated Condensed  Balance Sheets as of June 30, 2006 and December 31, 2005                                     |   |
|                                     |                                                                                                                 |   |
|                                     | Consolidated Condensed  Statements of Earnings for the Three Months and Six Months Ended June 30,  2006 and 2005     |   |
|                                     |                                                                                                                 |   |
|                                     | Consolidated Condensed  Statement of Shareholders’ Equity for the period from January 1, 2006 to June  30, 2006 |   |
|                                     |                                                                                                                 |   |
|                                     | Consolidated Condensed  Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005                     |   |
|                                     |                                                                                                                 |   |
|                                     | 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                                                                                                             |   |
|                                     |                                                                                                                 |   |
| **Signatures**                           |                                                                                                                 |   |
| ** **                               |                                                                                                                 |   |
| **Exhibit Index**                        |                                                                                                                 |   |

 

i

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**PART I - FINANCIAL INFORMATION**

**Item 1.                    FinancialStatements**

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

**CONSOLIDATED CONDENSED BALANCESHEETS**
| ** **                                      | ** ** | **June 30, 2006** | ** ** | **December 31,  2005**                                 | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**             | ** ** | **(derived from  audited financial  statements)** | ** ** |
| **ASSETS**                                      |       |                        |       |                                                        |       |
| CURRENT                                         |       |                        |       |                                                        |       |
| Cash and cash  equivalents                      |       | $                           | 1,501,879  |                                                        | $          | 1,771,624 |   |
| Accounts  receivable – net                 |       | 13,784,822                  |       | 12,567,256                                                  |       |
| Notes and other  receivables                    |       | 1,430,926                   |       | 2,727,393                                                   |       |
| Inventories –  net                         |       | 25,825,584                  |       | 26,173,990                                                  |       |
| Deferred income  taxes – net               |       | 1,496,000                   |       | 1,496,000                                                   |       |
| Assets held for  sale                           |       | 575,519                     |       | 623,519                                                     |       |
| Assets of  discontinued operations              |       | 304,087                     |       | 76,538                                                      |       |
| Prepaid expenses  and other current assets      |       | 1,118,393                   |       | 1,111,164                                                   |       |
| TOTAL CURRENT  ASSETS                           |       | 46,037,210                  |       | 46,547,484                                                  |       |
|                                            |       |                        |       |                                                        |       |
| PROPERTY AND EQUIPMENT                          |       |                        |       |                                                        |       |
| Land                                            |       | 1,174,773                   |       | 1,174,773                                                   |       |
| Buildings and  improvements                     |       | 5,464,971                   |       | 5,219,993                                                   |       |
| Machinery and  equipment                        |       | 9,000,615                   |       | 8,087,469                                                   |       |
|                                            |       | 15,640,359                  |       | 14,482,235                                                  |       |
| Less accumulated  depreciation and amortization |       | 8,073,759                   |       | 7,620,626                                                   |       |
| NET PROPERTY AND  EQUIPMENT                     |       | 7,566,600                   |       | 6,861,609                                                   |       |
|                                            |       |                        |       |                                                        |       |
| GOODWILL                                        |       | 24,763,793                  |       | 23,821,240                                                  |       |
|                                            |       |                        |       |                                                        |       |
| OTHER INTANGIBLE ASSETS  – net             |       | 11,496,083                  |       | 8,794,833                                                   |       |
|                                            |       |                        |       |                                                        |       |
| OTHER ASSETS – net                         |       | 447,164                     |       | 808,381                                                     |       |
|                                            |       |                        |       |                                                        |       |
| TOTAL ASSETS                                    |       | $                           | 90,310,850 |                                                        | $          | 86,833,547 |   |

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

1

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| ** **                                                                                                                                      | ** ** | **June 30, 2006** | ** ** | **December 31,  2005**                                 | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **(unaudited)**             | ** ** | **(derived from  audited financial  statements)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                   |       |                        |       |                                                        |       |
| CURRENT LIABILITIES                                                                                                                        |       |                        |       |                                                        |       |
| Short-term borrowings                                                                                                                           |       | $                           | 6,500,000  |                                                        | $          | 3,000,000 |   |
| Accounts payable                                                                                                                                |       | 4,496,486                   |       | 2,927,133                                                   |       |
| Income taxes payable                                                                                                                            |       | 145,081                     |       | 1,366,146                                                   |       |
| Accrued compensation                                                                                                                            |       | 1,506,248                   |       | 2,518,196                                                   |       |
| Other accrued liabilities                                                                                                                       |       | 3,393,642                   |       | 2,338,909                                                   |       |
| Current maturities of long-term debt                                                                                                            |       | 7,536,247                   |       | 4,058,729                                                   |       |
| Liabilities of discontinued operations                                                                                                          |       | 1,870,046                   |       | 2,357,573                                                   |       |
| TOTAL CURRENT LIABILITIES                                                                                                                       |       | 25,447,750                  |       | 18,566,686                                                  |       |
|                                                                                                                                            |       |                        |       |                                                        |       |
| LONG-TERM DEBT,  less current maturities                                                                                                        |       | 14,079,618                  |       | 19,572,651                                                  |       |
|                                                                                                                                            |       |                        |       |                                                        |       |
| DEFERRED INCOME  TAXES – net                                                                                                               |       | 978,000                     |       | 978,000                                                     |       |
|                                                                                                                                            |       |                        |       |                                                        |       |
| TOTAL LIABILITIES                                                                                                                               |       | 40,505,368                  |       | 39,117,337                                                  |       |
|                                                                                                                                            |       |                        |       |                                                        |       |
| 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 - 3,850,367 and 3,814,367 shares at June 30, 2006 and December 31,  2005, respectively |       | 3,850,367                   |       | 3,814,367                                                   |       |
| Class B - $1 par; authorized - 2,000,000 shares; no  shares issued                                                                              |       | —                      |       | —                                                      |       |
| Additional paid-in capital                                                                                                                      |       | 9,156,017                   |       | 8,947,855                                                   |       |
| Retained earnings                                                                                                                               |       | 39,170,275                  |       | 36,969,119                                                  |       |
| Treasury stock, at cost (272,607 and 244,576 shares  at June 30, 2006 and December 31, 2005, respectively)                                      |       | (2,371,177                  | )          | (2,015,131                                                  | )          |
|                                                                                                                                            |       |                        |       |                                                        |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                                 |       | 49,805,482                  |       | 47,716,210                                                  |       |
|                                                                                                                                            |       |                        |       |                                                        |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                |       | $                           | 90,310,850 |                                                        | $          | 86,833,547 |   |

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

2

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

**CONSOLIDATED CONDENSED STATEMENTSOF EARNINGS (unaudited)**
| ** **                                                                                                                                                                  | ** ** | **Three months  ended June 30,** | ** ** | **Six months  ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues                                                                                                                                                                |       | $                                               | 28,860,361 |                                          | $          | 28,130,059 |   | $ | 55,709,864 |   | $ | 52,454,323 |   |
| Cost of sales                                                                                                                                                               |       | 19,452,109                                      |       | 18,998,228                                    |       | 38,054,312 |   | 35,606,787 |   |
| Gross profit                                                                                                                                                                |       | 9,408,252                                       |       | 9,131,831                                     |       | 17,655,552 |   | 16,847,536 |   |
| Selling, general  and administrative expenses                                                                                                                               |       | 6,748,455                                       |       | 6,120,451                                     |       | 13,047,845 |   | 11,537,067 |   |
| Operating income                                                                                                                                                            |       | 2,659,797                                       |       | 3,011,380                                     |       | 4,607,707 |   | 5,310,469 |   |
| Interest expense – net                                                                                                                                                 |       | 522,058                                         |       | 485,974                                       |       | 1,014,012 |   | 901,103 |   |
| Earnings from  continuing operations before income taxes                                                                                                                    |       | 2,137,739                                       |       | 2,525,406                                     |       | 3,593,695 |   | 4,409,366 |   |
| Income taxes                                                                                                                                                                |       | 854,000                                         |       | 1,082,000                                     |       | 1,438,000 |   | 1,854,000 |   |
| Earnings from  continuing operations before discontinued operations                                                                                                         |       | 1,283,739                                       |       | 1,443,406                                     |       | 2,155,695 |   | 2,555,366 |   |
| Discontinued  operations (net of taxes):                                                                                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Earnings (loss) from operation of discontinued  operations (net of tax expense (benefit) of $30,000 and $31,000 for 2006 and  $22,000 and $(90,000) for 2005, respectively) |       | 43,416                                          |       | 41,518                                        |       | 45,461 |   | (178,270 | ) |
| Gain on sale of discontinued operations (net of tax expense  of $36,000 for 2005)                                                                                           |       | —                                          |       | —                                        |       | — |   | 71,232 |   |
| Earnings (loss) from discontinued operations                                                                                                                                |       | 43,416                                          |       | 41,518                                        |       | 45,461 |   | (107,038 | ) |
|                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Net earnings                                                                                                                                                                |       | $                                               | 1,327,155  |                                          | $          | 1,484,924 |   | $ | 2,201,156 |   | $ | 2,448,328 |   |
|                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Basic earnings  (loss) per common share:                                                                                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                                                                                                                                                       |       | $                                               | .36        |                                          | $          | .41 |   | $ | .60 |   | $ | .72 |   |
| Discontinued operations                                                                                                                                                     |       | .01                                             |       | .01                                           |       | .01 |   | (.03 | ) |
|                                                                                                                                                                        |       | $                                               | .37        |                                          | $          | .42 |   | $ | .61 |   | $ | .69 |   |
|                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Diluted earnings  (loss) per common share:                                                                                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Continuing operations                                                                                                                                                       |       | $                                               | .34        |                                          | $          | .37 |   | $ | .56 |   | $ | .66 |   |
| Discontinued operations                                                                                                                                                     |       | .01                                             |       | .01                                           |       | .01 |   | (.03 | ) |
|                                                                                                                                                                        |       | $                                               | .35        |                                          | $          | .38 |   | $ | .57 |   | $ | .63 |   |
|                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
|                                                                                                                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  common shares outstanding:                                                                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                                                                                       |       | 3,577,760                                       |       | 3,568,209                                     |       | 3,580,834 |   | 3,564,088 |   |
| Diluted                                                                                                                                                                     |       | 3,825,317                                       |       | 3,879,657                                     |       | 3,828,773 |   | 3,877,791 |   |

See accompanying notesto consolidated condensed financial statements (unaudited).

3

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

**CONSOLIDATED CONDENSED STATEMENTOF SHAREHOLDERS’ EQUITY (unaudited)**

|                                                                  | ** ** | ** ** | ** ** | **Class A Common   Stock, $1 Par** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **Total**  | ** ** | **Shares**                                                  | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**            | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                                                       |       |       |       |                                                        |       |                    |       |         |       |                    |       |   |   |   |   |
| **Balance,  January 1, 2006**                                    |       | $          | 47,716,210 |                                                        | 3,814,367  |                    | $          | 3,814,367    |       | $                       | 8,947,855  |   | $ | 36,969,119 |   | (244,576 | ) | $ | (2,015,131 | ) |
|                                                             |       |       |       |                                                        |       |                    |       |         |       |                    |       |   |   |   |   |
| Net earnings                                                     |       | 2,201,156  |       | —                                                      |       | —                  |       | —       |       | 2,201,156               |       | — |   | — |   |
| Issuance of  Class A common stock upon exercise of stock options |       | 208,580    |       | 36,000                                                      |       | 36,000                  |       | 172,580      |       | —                  |       | — |   | — |   |
| Share-based  compensation                                        |       | 35,582     |       | —                                                      |       | —                  |       | 35,582       |       | —                  |       | — |   | — |   |
| Shares  surrendered as payment for exercise of stock options     |       | (61,850    | )          | —                                                      |       | —                  |       | —       |       | —                  |       | (5,000 | ) | (61,850 | ) |
| Purchase of  Class A common stock                                |       | (294,196   | )          | —                                                      |       | —                  |       | —       |       | —                  |       | (23,031 | ) | (294,196 | ) |
| **Balance, June 30, 2006**                                       |       | $          | 49,805,482 |                                                        | 3,850,367  |                    | $          | 3,850,367    |       | $                       | 9,156,017  |   | $ | 39,170,275 |   | (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)**
| ** **                                                                                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Cash Flows from  Operating Activities of Continuing Operations:                                                         |       |                                              |       |   |   |
| Net earnings                                                                                                            |       | $                                                 | 2,201,156  |   | $ | 2,448,328 |   |
| (Earnings) loss from discontinued operations – net  of taxes                                                       |       | (45,461                                           | )          | 107,038 |   |
| Adjustments to reconcile net earnings to net cash  provided by (used in) operating activities of continuing operations: |       |                                              |       |   |   |
| Non-cash charges and credits:                                                                                           |       |                                              |       |   |   |
| Depreciation and amortization                                                                                           |       | 453,133                                           |       | 388,052 |   |
| Amortization of other intangible assets                                                                                 |       | 598,750                                           |       | 552,500 |   |
| Amortization of other assets                                                                                            |       | 3,000                                             |       | 3,000 |   |
| Provision for losses on accounts receivable - net                                                                       |       | 14,755                                            |       | 23,336 |   |
| Share-based compensation                                                                                                |       | 35,582                                            |       | — |   |
| Deferred income taxes – net                                                                                        |       | —                                            |       | (96,000 | ) |
| Changes in:                                                                                                             |       |                                              |       |   |   |
| Accounts receivable                                                                                                     |       | (655,327                                          | )          | (2,463,052 | ) |
| Notes and other receivables                                                                                             |       | 1,296,467                                         |       | 1,602,049 |   |
| Inventories                                                                                                             |       | 686,681                                           |       | (4,366,531 | ) |
| Prepaid expenses and other current assets                                                                               |       | (10,693                                           | )          | (219,021 | ) |
| Other assets                                                                                                            |       | 358,217                                           |       | (49,786 | ) |
| Accounts payable                                                                                                        |       | 1,567,213                                         |       | 1,659,471 |   |
| Accruals and other                                                                                                      |       | (1,178,280                                        | )          | (1,069,793 | ) |
| Total adjustments                                                                                                       |       | 3,124,037                                         |       | (3,928,737 | ) |
| Net cash  provided by (used in) operating activities of continuing operations                                           |       | $                                                 | 5,325,193  |   | $ | (1,480,409 | ) |

Seeaccompanying notes to consolidated condensed financial statements (unaudited).

5

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| ** **                                                                               | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Cash Flows from  Investing Activities of Continuing Operations:                          |       |                                              |       |   |   |
| Capital expenditures                                                                     |       | $                                                 | (908,124   | ) | $ | (267,896 | ) |
| Purchase of certain assets, net of certain  liabilities, of Pacific Stair Products, Inc. |       | (5,232,916                                        | )          | — |   |
| Additional payments for acquisition-related expenses                                     |       | (206,915                                          | )          | — |   |
| Additional purchase price adjustment                                                     |       | 37,613                                            |       | — |   |
| Proceeds from sale of certain assets of Green’s  Access Division                    |       | —                                            |       | 880,069 |   |
| Additional payments for purchase of Nationwide  Industries, Inc.                         |       | —                                            |       | (358,767 | ) |
|                                                                                     |       |                                              |       |   |   |
| Net cash (used in) provided by investing activities  of continuing operations            |       | (6,310,342                                        | )          | 253,406 |   |
|                                                                                     |       |                                              |       |   |   |
| Cash Flows from  Financing Activities of Continuing Operations:                          |       |                                              |       |   |   |
| Proceeds from short-term borrowings                                                      |       | 11,000,000                                        |       | 9,000,000 |   |
| Repayments of short-term borrowings                                                      |       | (7,500,000                                        | )          | (4,500,000 | ) |
| Repayments of term loan                                                                  |       | (1,900,000                                        | )          | (3,500,000 | ) |
| Principal payments on long-term debt                                                     |       | (115,515                                          | )          | (108,427 | ) |
| Proceeds from exercise of stock options                                                  |       | 146,730                                           |       | 214,105 |   |
| Purchase of Class A common stock                                                         |       | (294,196                                          | )          | (107,241 | ) |
|                                                                                     |       |                                              |       |   |   |
| Net cash provided by financing activities of  continuing operations                      |       | 1,337,019                                         |       | 998,437 |   |
|                                                                                     |       |                                              |       |   |   |
| Cash Flows from  Discontinued Operations:                                                |       |                                              |       |   |   |
| Net cash (used in) provided by operating activities                                      |       | (565,038                                          | )          | 2,608,605 |   |
| Net cash used in investing activities                                                    |       | —                                            |       | (1,079,975 | ) |
| Net cash used in financing activities                                                    |       | (56,577                                           | )          | (56,576 | ) |
|                                                                                     |       |                                              |       |   |   |
| Net cash (used in) provided by discontinued  operations                                  |       | (621,615                                          | )          | 1,472,054 |   |
|                                                                                     |       |                                              |       |   |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                    |       | (269,745                                          | )          | 1,243,488 |   |
| Cash and cash  equivalents at beginning of period                                        |       | 1,771,624                                         |       | 1,189,869 |   |
| Cash and cash  equivalents at end of period                                              |       | $                                                 | 1,501,879  |   | $ | 2,433,357 |   |

 
| **Supplemental disclosures of  cash flow information:** |   |   |      |   |   |
|---------------------------------------------------------|--------|--------|-----------|--------|--------|
| Cash paid for:                                          |   |   |      |   |   |
| Interest                                                |   | $      | 949,000   |   | $      | 888,000 |   |
| Income taxes                                            |   | $      | 2,945,000 |   | $      | 3,076,000 |   |

6

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Non-cash investing and financing activities wereas follows:

Inconnection with the sale of certain assets of Green’s Access Division inFebruary 2005, the Company received interest-bearing promissory notes ofapproximately $877,000, as adjusted, payable in varying amounts throughNovember 2006.

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

During the six months ended June 30, 2005, theCompany received 6,418 shares of Class A Common Stock in connection with theexercise of options to purchase 14,000 shares of Class A Common Stock. Thevalue of these shares was recorded at $107,241.

See accompanying notes to consolidated condensedfinancial statements (unaudited).

7

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**P&FINDUSTRIES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS (unaudited)**

**NOTE 1 - SUMMARY OF ACCOUNTING POLICIES**

**Principles of Consolidation**

Theunaudited consolidated condensed financial statements contained herein includethe accounts of P&F Industries, Inc. and its subsidiaries. Allsignificant intercompany balances and transactions have been eliminated.

P&FIndustries, Inc. (“P&F”) conducts its business operations through twoof its wholly-owned subsidiaries: Florida Pneumatic ManufacturingCorporation (“Florida Pneumatic”) and Countrywide Hardware, Inc. (“Countrywide”).P&F and its subsidiaries are herein referred to collectively as the “Company.”In addition, the words “we”, “our” and “us” refer to the Company.

FloridaPneumatic is engaged in the importation, manufacture and sale of pneumatic handtools, primarily for the industrial, retail and automotive markets, and theimportation and sale of compressor air filters. Florida Pneumatic also markets,through its Berkley Tool division (“Berkley”), a line of pipe cutting andthreading tools, wrenches and replacement electrical components for awidely-used brand of pipe cutting and threading machines. In addition, throughits Franklin Manufacturing (“Franklin”) division, Florida Pneumatic imports aline of door and window hardware. Countrywide conducts its business operationsthrough Nationwide Industries, Inc. (“Nationwide”), through WoodmarkInternational, L.P. (“Woodmark”), a limited partnership between Countrywide andWILP Holdings, Inc., a subsidiary of Countrywide, and through PacificStair Products, Inc. (“Pacific Stair”). Nationwide is an importer andmanufacturer of door, window and fencing hardware. Woodmark is an importer ofbuilders’ hardware, including staircase components and kitchen and bathhardware and accessories. In January 2006,Countrywide acquired substantially all of the operating assets of PacificStair, a manufacturer of premium stair rail products and a distributorof Woodmark’s staircase components to the building industry, primarily insouthern California and the southwestern region of the United States (see Note6). The Company’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 (see Note 7) throughthe sale of substantially all of its non-real estate assets. The Company’swholly-owned subsidiary, Green Manufacturing, Inc. (“Green”), wasprimarily engaged in the manufacture, development and sale of heavy-duty weldedcustom designed hydraulic cylinders until it exited that business in December 2004through the sale of certain assets. Green also manufactured a line of access equipmentfor the petro-chemical industry until it exited that business in February 2005through the sale of certain assets and a line of post hole digging equipmentfor the agricultural industry until it exited that business in July 2005through the sale of certain assets. Green has effectively ceased all operatingactivities (see Note 7). Note 12 presents financial information for thesegments of the Company’s business.

**Basis ofFinancial Statement Presentation**

Theaccompanying unaudited consolidated condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information, and with the rules andregulations of the Securities and Exchange Commission regarding interimfinancial reporting. Accordingly, these interim financial statements do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of the Company, these unaudited consolidated 

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condensed financial statementsinclude all adjustments necessary to present fairly the information set forththerein. All such adjustments are of a normal recurring nature. Results forinterim periods are not necessarily indicative of results to be expected for afull year.

Theresults of operations for Embassy and Green have been segregated fromcontinuing operations and are reflected on the consolidated condensedstatements of earnings as discontinued operations.

Theunaudited consolidated condensed balance sheet information as of December 31,2005 was derived from the audited financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31,2005. The interim financial statements contained herein should be read inconjunction with that Report.

Inpreparing its unaudited consolidated condensed financial statements inconformity with accounting principles generally accepted in the United Statesof America, the Company is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, the Company evaluates estimates, including those related tobad debts, inventory reserves, goodwill and intangible assets. The Companybases its estimates on historical data and experience, when available, and onvarious 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.

**NOTE 2 -EARNINGS PER SHARE**

Basicearnings (loss) per common share is based only on the average number of sharesof common stock outstanding for the periods. Diluted earnings (loss) per commonshare reflects the effect of shares of common stock issuable upon the exerciseof options, unless the effect on earnings is antidilutive.

Dilutedearnings (loss) per common share is computed using the treasury stock method.Under this method, the aggregate number of shares of common stock outstandingreflects the assumed use of proceeds from the hypothetical exercise of anyoutstanding options or warrants to purchase shares of the Company’s Class ACommon Stock. The average market value for the period is used as the assumedpurchase price.

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Thefollowing table sets forth the computation of basic and diluted earnings (loss)per common share:
|                                                                                                                     | ** ** | **Three months ended  June 30,**                                                          | ** ** | **Six months ended  June 30,**                                                            | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| Numerator:                                                                                                          |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Numerator for basic and diluted earnings (loss) per  common share:                                                  |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Earnings from continuing operations                                                                                 |       | $                                                                                                        | 1,283,739  |                                                                                                     | $          | 1,443,406 |   | $ | 2,155,695 |   | $ | 2,555,366 |   |
| Discontinued operations, net of taxes                                                                               |       | 43,416                                                                                                   |       | 41,518                                                                                                   |       | 45,461 |   | (107,038 | ) |
| Net earnings                                                                                                        |       | $                                                                                                        | 1,327,155  |                                                                                                     | $          | 1,484,924 |   | $ | 2,201,156 |   | $ | 2,448,328 |   |
|                                                                                                                |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Denominator:                                                                                                        |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Denominator for basic earnings per share – weighted  average common shares outstanding                         |       | 3,577,760                                                                                                |       | 3,568,209                                                                                                |       | 3,580,834 |   | 3,564,088 |   |
| Effect of dilutive securities:                                                                                      |       |                                                                                                     |       |                                                                                                     |       |   |   |   |   |
| Stock options                                                                                                       |       | 247,557                                                                                                  |       | 311,448                                                                                                  |       | 247,939 |   | 313,703 |   |
| Denominator for  diluted earnings per share – adjusted weighted average common shares and  assumed conversions |       | 3,825,317                                                                                                |       | 3,879,657                                                                                                |       | 3,828,773 |   | 3,877,791 |   |

At June 30, 2006 and duringthe three-month and six-month periods ended June 30, 2006, there wereoutstanding stock options whose exercise prices were higher than the averagemarket values of the underlying Class A Common Stock for the period. Theseoptions are anti-dilutive and are excluded from the computation of earnings pershare. The weighted average anti-dilutive stock options outstanding were asfollows:
|                                                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  anti-dilutive stock options outstanding |       | 29,500                                          |       | —                                        |       | 29,500 |   | — |   |

**NOTE 3 - STOCK-BASED COMPENSATION**

Stock-based Compensation

On January 1,2006, the Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R),“Share-Based Payment” (“Statement 123(R)”), which revises FASB SFAS No. 123,“Accounting for Stock-Based Compensation”, and supersedes APB Opinion 25, “Accountingfor Stock Issued to Employees”. Statement 123(R) requires the Company torecognize expense related to the fair value of our stock-based compensationawards, including employee stock options.

Priorto the adoption of Statement 123(R), the Company accounted for stock-basedcompensation awards using the intrinsic value method of APB Opinion 25.Accordingly, the Company did not recognize compensation expense in itsstatement of earnings for options granted that had an exercise price equal tothe market value of the underlying common stock on the date of grant. Asrequired by Statement 123, the Company also provided certain pro formadisclosures for stock-based awards as if the fair-value-based approach ofStatement 123 had been applied.

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TheCompany has elected to use the modified prospective transition method aspermitted by Statement 123(R) and therefore has not restated its financialresults for prior periods. Under this transition method, the Company appliedthe provisions of Statement 123(R) to new awards and to awards modified,repurchased, or cancelled after January 1, 2006. Additionally, the Companywill recognize compensation cost for the portion of the awards for which therequisite service has not been rendered (unvested awards) that are outstandingas of January 1, 2006, as the remaining service is rendered. Thecompensation cost the Company records for these awards will be based on theirgrant-date fair value as calculated for the pro forma disclosures required byStatement 123.

Nostock-based compensation cost related to stock options was recognized in thestatements of earnings for the years ended December 31, 2005 and 2004, asall options granted in these periods had an exercise price equal to the marketprice at the date of grant. As a result of adopting Statement 123(R), theCompany’s earnings before income taxes and net earnings for the three-monthperiod ended June 30, 2006 were approximately $18,000 and $10,000 lower,and for the six-month period ended June 30, 2006 were approximately$36,000 and $21,000 lower, than if we had continued to account for stock-basedcompensation under APB Opinion 25. Compensation expense is recognized in thegeneral and administrative expenses line item of the Company’s statements ofearnings on a straight-line basis over the vesting periods. There are nocapitalized stock-based compensation costs at June 30, 2006 and 2005. Theadoption of Statement 123(R) had no material impact on our basic anddilutive earnings per common share for the three-month and six-month periods endedJune 30, 2006.

Thefollowing table illustrates the effect on net earnings after tax and netearnings per common share as if we had applied the fair value recognitionprovisions of Statement 123 to stock-based compensation for the three-month andsix-month periods ended June 30, 2005:
|                                                                                                                          | ** ** | **Three months  ended  June 30, 2005** | ** ** | **Six months  ended  June 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net earnings as  reported                                                                                                |       | $                                                     | 1,485,000  |                                                | $          | 2,448,000 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method,  net of related tax effects |       | (6,000                                                | )          | (12,000                                             | )          |
| Pro forma net  earnings                                                                                                  |       | $                                                     | 1,479,000  |                                                | $          | 2,436,000 |   |
|                                                                                                                     |       |                                                  |       |                                                |       |
| Basic earnings  per common share                                                                                         |       |                                                  |       |                                                |       |
| As reported                                                                                                              |       | $                                                     | .42        |                                                | $          | .69 |   |
| Pro forma                                                                                                                |       | $                                                     | .41        |                                                | $          | .68 |   |
| Diluted earnings  per common share                                                                                       |       |                                                  |       |                                                |       |
| As reported                                                                                                              |       | $                                                     | .38        |                                                | $          | .63 |   |
| Pro forma                                                                                                                |       | $                                                     | .38        |                                                | $          | .63 |   |

The fair value of options grantedis estimated on the date of grant using the Black-Scholes option pricing model.

Stock Option Plan

TheCompany’s 2002 Incentive Stock Option Plan (the “Current Plan”) authorizes theissuance, to employees and directors, of options to purchase a maximum of1,100,000 shares of Class A Common Stock. These options must be issuedwithin ten years of the effective date of the Plan and are exercisable for aten 

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year period from the date ofgrant, at prices not less than 100% of the market value of the Class ACommon Stock on the date the option is granted. Options granted to any 10%stockholder are exercisable for a five year period from the date of grant, atprices not less than 110% of the market value of the Class A Common Stockon the date the option is granted. Options typically vest immediately. In theevent options granted contain a vesting schedule over a period of years, theCompany recognizes compensation cost for these awards on a straight-line basisover the service period. The Current Plan, which terminates in 2012, is thesuccessor to the Company’s 1992 Incentive Stock Option Plan (the “Prior Plan”).

Thefollowing is a summary of the changes in outstanding options for the six monthsended June 30, 2006:
|                                    | ** ** | **Option  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|--------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding,  January 1, 2006 |       | 596,900            |       | $                                          | 7.58       |                                                                 | 4.7        |                            |       |   |
| Granted                            |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Exercised                          |       | (36,000            | )          | 5.79                                       |       | —                                                               |       |                            |       |
| Forfeited                          |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Expired                            |       | —             |       | —                                     |       | —                                                               |       |                            |       |
| Outstanding,  June 30, 2006   |       | 560,900            |       | $                                          | 7.69       |                                                                 | 4.2        |                            | $          | 2,557,000 |   |
|                               |       |               |       |                                       |       |                                                                 |       |                            |       |
| Vested, June 30,  2006        |       | 511,412            |       | $                                          | 7.53       |                                                                 | 4.3        |                            | $          | 2,414,000 |   |

There were no stock options grantedduring the six months ended June 30, 2006 and 2005. The total intrinsicvalue of stock options exercised during the six months ended June 30, 2006and 2005 was $223,000 and $266,000, respectively.

The following is a summary of changes in non-vestedshares for the six months ended June 30, 2006:

|                                          | ** ** | **Option Shares** | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|
| Non-vested  shares, January 1, 2006 |       | 49,488                 |       | $                                                          | 3.77       |   |
| Granted                                  |       | —                 |       | —                                                     |       |
| Vested                                   |       | —                 |       | —                                                     |       |
| Forfeited                                |       | —                 |       | —                                                     |       |
| Non-vested shares,  June 30, 2006   |       | 49,488                 |       | $                                                          | 3.77       |   |

TheCompany recognizes compensation cost over the requisite service period.However, the exercisability 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 isrecorded.

Other Information

Asof June 30, 2006, the Company has approximately $66,000 of totalunrecognized compensation cost related to non-vested awards granted under ourshare-based plans, which we expect to recognize over a weighted-average periodof 2.5 years.

TheCompany received cash from options exercised during the six-months ended June 30,2006 of approximately $147,000. The impact of these cash receipts is includedin financing activities in the accompanying consolidated condensed statementsof cash flows. Statement 123(R) requires that cash flows from taxbenefits attributable to tax deductions in excess of the compensation costrecognized for those options (excess tax benefits) be classified as financingcash flows.

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Thenumber of shares of Class A common stock reserved for stock optionsavailable for issuance under the Current Plan as of June 30, 2006 was683,400. Of the options outstanding at June 30, 2006, 348,100 were issuedunder the Current Plan and 212,800 were issued under the Prior Plan.

**NOTE 4 -FOREIGN CURRENCY TRANSACTIONS**

**Derivative Financial Instruments**

The Company uses derivatives toreduce its exposure to fluctuations in foreign currencies, principally Japaneseyen. Derivative products, specifically foreign currency forward contracts, areused to hedge the foreign currency market exposures underlying certain debt andforecasted transactions with foreign vendors. The Company does not enter intosuch contracts for speculative purposes.

Forderivative instruments that are designated and qualify as fair value hedges(i.e., hedging the exposure to changes in the fair value of an asset or aliability or an identified portion thereof that is attributable to a particularrisk), the gain or loss on the derivative instrument as well as the offsettinggain or loss on the hedge item attributable to the hedged risk are recognizedin earnings in the current period. For derivative instruments that aredesignated and qualify as a cash flow hedge (i.e., hedging the exposure ofvariability in the expected future cash flows that would be attributable to aparticular risk), the effective portion of the gain or loss on the derivativeinstrument is reported as a component of accumulated comprehensive loss (acomponent of shareholders’ equity) and reclassified into earnings in the sameperiod or periods during which the hedged transaction affects earnings. Theremaining gain or loss on the derivative instrument, if any (i.e., the ineffectiveportion and any portion of the derivative instrument excluded from theassessment of effectiveness), is recognized in earnings in the current period.For derivative instruments not designated as hedging instruments, changes inthe fair market values are recognized in earnings as a component of cost ofsales.

TheCompany accounts for changes in the fair value of its foreign currencycontracts by marking them to market and recognizing any resulting gains orlosses through its statement of earnings. The Company also marks itsyen-denominated payables to market, recognizing any resulting gains or lossesin its statement of earnings. At June 30, 2006, the Company had foreigncurrency forward contracts, maturing in 2006, to purchase Japanese yen atcontracted forward rates. The value of these contracts at June 30, 2006,based on that day’s closing spot rate, was approximately $1,151,000, which wasthe approximate value of the Company’s yen-denominated accounts payable. Duringthe three-month periods ended June 30, 2006 and 2005, the Company recordedin its cost of sales a net realized loss of approximately $3,000 and a netrealized gain of $12,000, respectively, on foreign currency transactions.During the six-month periods ended June 30, 2006 and 2005, the Companyrecorded in its cost of sales a net realized gain of approximately $7,000 and anet realized loss of $90,000, respectively, on foreign currency transactions.At June 30, 2006 and 2005, the Company had no unrealized gains or lossesin foreign currency transactions.

**NOTE 5 - NEWACCOUNTING PRONOUNCEMENTS**

In June 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation, orFIN, No. 48, “Accounting forUncertainty in Income Taxes”. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,**“Accounting forIncome Taxes”. FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. This interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and 

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transition. FIN 48is effective for fiscal years beginning after December 15, 2006. Earlierapplication of the provisions of this Interpretation is encouraged if theenterprise has not yet issued financial statements, including interimstatements, in the period this Interpretation is adopted. The Company ispresently evaluating the effect of the adoption of this interpretation on itsresults of operations or financial position.

In February 2006,FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments – an amendment of FASB Statements No. 133 and 140.” SFAS No. 155allows companies to elect to measure at fair value entire financial instrumentscontaining embedded derivatives that would otherwise have to be accounted forseparately. It also requires companies to identify interests in securitizedfinancial assets that are freestanding derivatives or contain embeddedderivatives that would have to be accounted for separately, clarifies whichinterest- and principal-only strips are subject to SFAS No. 133, andamends 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 is effective for all financial instrumentsacquired, issued or subject to a remeasurement event after the beginning of acompany’s first fiscal year that begins after September 15, 2006. TheCompany does not expect adoption of SFAS No. 155 to have a material effecton its results of operations or financial position.

In March 2006,the FASB issued SFAS No. 156, “Accounting for Servicing of FinancialAssets–an amendment of FASB Statement No. 140.” SFAS No. 156 requiresthe 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 is effectiveas of the beginning of a company’s first fiscal year that begins after September 15,2006. The Company does not expect adoption of SFAS No. 156 to have amaterial effect on its results of operations or financial position.

**NOTE 6—ACQUISITION**

Pacific StairProducts, Inc.

Pursuantto an Asset Purchase Agreement (the “PSP APA”), dated December 20, 2005,between Pacific Stair Products, a California corporation (“Old PSP”), andPacific Stair Products, Inc., a newly-formed Delaware corporation (“PacificStair”) and a wholly-owned subsidiary of Countrywide, effective January 3,2006, Pacific Stair purchased substantially all of the operating assets of OldPSP. The total purchase price for the assets was approximately $5,233,000,subject to adjustments, plus the assumption of certain liabilities andobligations by Pacific Stair. The assets purchased pursuant to the PSP APAinclude, among others, accounts receivable, inventory, machinery and equipmentand certain intangibles. Certain assets were retained by Old PSP including cashand title to any real property. The purchase price, including directacquisition costs, represents a premium over the fair value of the assetspurchased of approximately $4,243,000, which will be allocated among goodwilland other intangible assets. Pacific Stair is a manufacturer of premium stairrail products and a distributor of staircase components to the buildingindustry, primarily in southern California and the southwestern region of theUnited States. As a result of this transaction, Countrywide has increased itspurchasing power and geographic distribution. The acquisition was financedthrough the Company’s credit facility with Citibank. The consolidated condensed financial statements presented hereininclude the results of operations for Pacific Stair for the period from January 3,2006 to June 30, 2006.

The purchase price forthis acquisition, negotiated on the basis of Pacific Stair’s historicalfinancial performance, was as follows:

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|                                                          | ** ** | **                            ** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Cash paid at  closing from short-term borrowings         |       | $                                                                                                                                                                            | 5,233,000  |   |
| Purchase price  reduction for working capital adjustment |       | (38,000                                                                                                                                                                      | )          |
| Direct  acquisition costs                                |       | 207,000                                                                                                                                                                      |       |
| Total purchase price                                     |       | $                                                                                                                                                                            | 5,402,000  |   |

 

The following table presents the estimated fair values of the net assetsacquired and the amount allocated to goodwill:
| Current and other assets                 |   |      |      | $         | 911,000   |   |
|------------------------------------------|--------|-----------|-----------|-----------|-----------|--------|
| Property and  equipment                  |   |      |      | 250,000   |      |
| Identifiable  intangible assets:         |   |      |      |      |      |
| Customer relationships                   |   | $         | 1,800,000 |      |      |   |
| Tradename                                |   | 1,450,000 |      |      |      |
| Non-compete and employment agreements    |   | 50,000    |      | 3,300,000 |      |
|                                     |   |      |      | 4,461,000 |      |
| Less:  liabilities assumed               |   |      |      | 2,000     |      |
| Total fair value  of net assets acquired |   |      |      | 4,459,000 |      |
| Goodwill                                 |   |      |      | 943,000   |      |
| Total purchase price                     |   |      |      | $         | 5,402,000 |   |
|                                          |        |           |           |           |           |        |  |

The Company obtained anindependent third-party valuation of the identifiable intangible assets. Theexcess of the total purchase price over the fair value of the net assetsacquired, including the value of the identifiable intangible assets, has beenallocated to goodwill. Goodwill will be amortized, for fifteen years, for taxpurposes but not for financial reporting purposes. The fair values of the identifiableintangible assets are based on current information and are subject to change.The intangible assets subject to amortization will be amortized over fifteenyears for tax purposes and for financial reporting purposes and have beenassigned useful lives as follows:
| Customer relationships                 |   | 25 years   |   |
|----------------------------------------|--------|------------|--------|
| Tradename                              |   | Indefinite |   |
| Non-compete and  employment agreements |   | 5 years    |   |

The following unaudited proforma financial information presents the combined results of operations of theCompany and its Pacific Stair acquisition as if it had occurred at the beginningof the periods presented. The pro forma financial information reflectsappropriate adjustments for amortization of intangible assets, additionalcompensation related to an employment agreement, interest expense and incometaxes. The pro forma financial information presented is not necessarilyindicative of either the actual consolidated operating results had theacquisition been completed at the beginning of each period or future operatingresults of the consolidated entities.
|                                                        | ** ** | **Three Months  Ended June 30,  2005** | ** ** | **Six Months  Ended June 30,  2005** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net revenues                                           |       | $                                                     | 29,449,000 |                                                | $          | 55,034,000 |   |
| Net earnings  from continuing operations               |       | $                                                     | 1,672,000  |                                                | 2,898,000  |   |
| Earnings per  common share from continuing operations: |       |                                                  |       |                                                |       |
| Basic                                                  |       | $                                                     | .47        |                                                | $          | .81 |   |
| Diluted                                                |       | $                                                     | .43        |                                                | $          | .75 |   |

 

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** **

**NOTE 7 – DISCONTINUED OPERATIONS**

Embassy Industries, Inc.

Pursuant to an AssetPurchase Agreement (the “Embassy APA”), 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 ofits operating assets to EMI. The assets sold pursuant to the Embassy APAinclude, among others, machinery and equipment, inventory, accounts receivableand certain intangibles. Certain assets were retained by Embassy, including,but not limited to, cash and title to any real property owned by Embassy at theconsummation of the sale to EMI. The consideration paid by EMI for the assetsacquired pursuant to the Embassy APA was approximately $8,433,000 plus the assumptionof certain liabilities and obligations of Embassy by EMI.

Pursuant to a Lease,dated as of October 11, 2005, between Embassy, as landlord and EMI, astenant (the “EMI Lease”), Embassy agreed to lease certain space (approximately60,000 rentable square feet) in the building located at 300 Smith Street,Farmingdale, New York to EMI in connection with the operation of EMI’sbusiness, at an annual rental rate of $480,000, payable in monthly installmentsof $40,000 each. The term of the EMI Lease was for a period of six (6) monthscommencing October 11, 2005 and terminating April 10, 2006; providedhowever, that, in the event EMI served notice on Embassy by December 31,2005, the Lease could be extended on a month to month basis to, and including, June 30,2006. EMI served notice on Embassy to extend the EMI Lease through May 31,2006.

Embassyhas effectively ceased all operating activities. The Company recognizeda gain on the sale of these assets of approximately $1,467,000, net of taxes,during the fourth quarter of fiscal 2005.

On July 24, 2006,Embassy received a letter (the “Purchaser Letter”) from counsel to J. D’Addario &Company, Inc., a New York corporation (“Purchaser”), purporting toterminate that certain contract entered into by Embassy and Purchaser on January 13,2006 (the “Agreement”, and as amended, the “Contract of Sale”). Pursuant to theContract of Sale, Embassy agreed to sell its Farmingdale, New York premises(the “Farmingdale Premises”) to Purchaser for a purchase price of $6,403,000.

The sale of theFarmingdale Premises was contingent upon completion of due diligence and otherconditions set forth in the Contract of Sale, including, without limitation,that upon the expiration of the Investigation Period (as defined in theContract of Sale), Embassy was to proceed with certain environmentalremediation at the Farmingdale Premises (the “Required EnvironmentalRemediation”) to the satisfaction of the Suffolk County Department of HealthServices (“SCDHS”), to obtain a “No Further Action” letter from SCDHS, and toprovide a copy of said letter to Purchaser upon Embassy’s receipt thereof.

Upon the expiration ofthe Investigation Period, Embassy completed the Required EnvironmentalRemediation. On May 30, 2006, SCDHS issued a letter (the “SCDHS Letter”)stating that no further remediation will be required by SCDHS at this time withrespect to the Required Environmental Remediation. The SCDHS Letter also notedthat laboratory data provided for the upgradient groundwater sample (the “Sample”)indicated that groundwater contamination exists, and that, due to thesignificant exceedences noted, this information was reported to the New YorkState Department of Environmental Conservation (“NYSDEC”) Spills Unit, and aNYSDEC Spill Number (the “DEC Spill Number”) was assigned. Embassy delivered acopy of the SCDHS Letter to Purchaser pursuant to the terms of the Contract ofSale.

TheSample was contaminated with petroleum, and, to the Company’s knowledge, nopetroleum products were used, stored or handled by Embassy at the FarmingdalePremises at or near the location where the Sample was collected. The Sample wascollected from an upgradient location near the northern border of theFarmingdale Premises, which is in close proximity to a neighboring propertythat experienced a petroleum release. Shortly following receipt of the SCDHSLetter, NYSDEC verbally advised Embassy that it approved an investigationwork-plan submitted by Embassy; the purpose of the investigation was to confirmthat the contamination does not originate at the Farmingdale Premises. Theinvestigation was completed on August 2, 2006 and the investigation results,which confirmed that the source of the petroleum contamination is not theFarmingdale Premises, were submitted to the NYSDEC on August 7, 2006. OnAugust 11, 2006, the NYSDEC advisedEmbassy that, based on the results of the investigation,  it is apparent that the Farmingdale Premises is not the source ofgroundwater contamination that was discovered based on the Sample, and thattherefore the NYSDEC database has been modified to remove the FarmingdalePremises as the source of the contamination.

The Purchaser Letterpurports to terminate the Contract of Sale based upon Purchaser’s assertionthat the SCDHS Letter does not constitute a “No Further Action” letter asrequired by the Contract of Sale, and demands that the escrow agent return thedownpayment with accrued interest, and that 

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Purchaser be reimbursed for the costs of survey andtitle examination.

Embassy has informed Purchaserthat, in light of the contents of the SCDHS Letter, Purchaser’s purportedtermination of the Contract of Sale is without effect, and that Purchaser is indefault of its obligation to consummate the purchase of the FarmingdalePremises under the terms of the Contract 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 with costs of title and survey and interestthereon, and the cost of the action. Embassy believes the action is withoutmerit and intends to vigorously defend it.

Green Manufacturing, Inc. – Agricultural ProductsDivision

Pursuant to an AssetPurchase Agreement (the “Agricultural APA”), dated as of July 14, 2005,between Green and Benko Products, Inc. (“Benko”), Green sold certain ofits assets comprising its Agricultural Products Division (the “AgriculturalDivision”) to Benko. The assets sold pursuant to the Agricultural APA include,among others, certain machinery and equipment. Certain assets of theAgricultural Division were retained by Green, including, but not limited to,certain of the Agricultural Division’s accounts receivable and inventoriesexisting at the consummation of the sale to Benko (the “Agricultural Closing”).

The purchase price paidby Benko in consideration for the assets acquired pursuant to the AgriculturalAPA was $530,000, consisting of (a) a payment to Green at AgriculturalClosing of $225,000; (b) $25,000 payable pursuant to the terms of aPromissory Note (“Agricultural Note 1”), dated July 14, 2005, payable inequal monthly amounts over a five (5) month period commencing as of theAgricultural Closing; and (c) $280,000 payable pursuant to the terms of aPromissory Note (collectively with Agricultural Note 1, the “Agricultural Notes”),dated July 14, 2005, payable in equal monthly amounts over a four (4) yearperiod commencing as of the Agricultural Closing. In addition, Benko assumedcertain of Green’s contractual obligations. The obligations of Benko under theAgricultural APA and the Agricultural Notes are guaranteed by each of aprincipal shareholder and an affiliate of Benko, and partially secured bycertain collateral.

In connection with thetransaction, Green and Benko entered into an agreement which provides for Benkoto purchase from Green 100% of Benko’s requirements for products of the typethat constitute part of Green’s inventory of raw materials and finished goodsas of the acquisition date with all purchases by Benko being binding andnon-cancelable at pre-established prices. The term was for a period of one yearfrom the acquisition date. At June 30, 2006, all of Green’s inventory waspurchased by Benko.

The Company recognized again on the sale of these assets of approximately $312,000, net of taxes, infiscal 2005.

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Green Manufacturing, Inc. – Access Division

Pursuant to an AssetPurchase Agreement (the “Access APA”), dated as of February 2, 2005,between Green and Benko Products, Inc. (“Benko”), Green sold certain ofits assets comprising its Access Division (the “Access Division”) to Benko. Theassets sold pursuant to the Access APA include, among others, certain machineryand equipment, accounts receivable (“Purchased Receivables”), inventory,intellectual property and other intangibles. Certain assets of the AccessDivision were retained by Green, including, but not limited to, certain of theAccess Division’s accounts receivable existing at the consummation of the saleto Benko (the “Access Closing”).

The purchase price paidby Benko in consideration for the assets acquired pursuant to the Access APA,giving effect to certain adjustments, was approximately $1,756,655, consistingof (a) a payment to Green at Access Closing of approximately $880,069; (b) $755,724payable pursuant to the terms of a Promissory Note (“Access Note 1”), dated February 2,2005, payable in various amounts over a twenty-one (21) month period commencingas of the Access Closing; and (c) $120,862 payable pursuant to the termsof a Promissory Note (collectively with Access Note 1, the “Access Notes”),dated February 2, 2005, payable in various amounts over a four (4) monthperiod commencing as of the Access Closing. Benko agreed to pay additionalconsideration on an annual basis for the two (2) successive twelve (12)month periods commencing as of the Access Closing, dependent on certain salesby Benko, subject to certain other conditions. In addition, Benko assumedcertain of Green’s contractual obligations. The obligations of Benko under theAccess APA and the Access Notes are guaranteed by each of a principalshareholder and an affiliate of Benko, and partially secured by certaincollateral.

Benko has withheldcertain payments regarding its outstanding Access Note as a result of adisagreement regarding certain representations made by the Company in theAccess APA. As such, the Company recorded a reserve of $150,000 at December 31,2005. The Company and Benko are negotiating the rescheduling of payments underboth the Access Note and the outstanding Agricultural Note and the resolutionof this matter.

The Company recognized again on the sale of these assets of approximately $71,000, net of taxes, infiscal 2005.

The following amountsrelated to Embassy and Green have been segregated from the Company’s continuingoperations and are reported as assets held for sale and assets and liabilitiesof discontinued operations in the consolidated condensed balance sheets:
|                                                                   | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Assets held for  sale and assets of discontinued operations:      |       |                        |       |                            |       |
| Prepaid expenses                                                  |       | $                           | 304,000    |                            | $          | 77,000 |   |
| Assets held for  sale                                             |       | 576,000                     |       | 623,000                         |       |
| Total assets  held for sale and assets of discontinued operations |       | $                           | 880,000    |                            | $          | 700,000 |   |
|                                                              |       |                        |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                        |       |                            |       |
| Accounts payable  and accrued expenses                            |       | $                           | 559,000    |                            | $          | 991,000 |   |
| Mortgage payable                                                  |       | 1,311,000                   |       | 1,367,000                       |       |
| Total liabilities of  discontinued operations                     |       | $                           | 1,870,000  |                            | $          | 2,358,000 |   |

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Results of operations for Embassy and Green areincluded from the beginning of each fiscal period presented through therespective dates of asset disposition, and have been segregated from continuingoperations and reflected as discontinued operations approximately as follows: 
|                                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues                                                             |       | $                                               | —     |                                          | $          | 2,761,000 |   | $ | — |   | $ | 5,924,000 |   |
| Earnings (loss)  from operation of discontinued operations, before taxes |       | $                                               | 73,000     |                                          | $          | 64,000 |   | $ | 76,000 |   | $ | (268,000 | ) |
| Income tax  (expense) benefit                                            |       | (30,000                                         | )          | (22,000                                       | )          | (31,000 | ) | 90,000 |   |
| Earnings (loss)  from operation of discontinued operations               |       | 43,000                                          |       | 42,000                                        |       | 45,000 |   | (178,000 | ) |
| Gain on sale of  discontinued operations, before taxes                   |       | —                                          |       | —                                        |       | — |   | 107,000 |   |
| Income tax  expense                                                      |       | —                                          |       | —                                        |       | — |   | (36,000 | ) |
| Gain on sale of  discontinued operations                                 |       | —                                          |       | —                                        |       | — |   | 71,000 |   |
| Earnings (loss) from  discontinued operations                            |       | $                                               | 43,000     |                                          | $          | 42,000 |   | $ | 45,000 |   | $ | (107,000 | ) |

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

Accountsreceivable -net consists of:
|                                  | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Trade accounts  receivables      |       | $                           | 13,989,000 |                            | $          | 12,757,000 |   |
| Allowance for  doubtful accounts |       | (204,000                    | )          | (190,000                        | )          |
|                             |       | $                           | 13,785,000 |                            | $          | 12,567,000 |   |

**NOTE 9 -INVENTORIES**

Inventories - net consist of:
|                                                   | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw material                                      |       | $                           | 2,410,000  |                            | $          | 2,209,000 |   |
| Work in process                                   |       | 411,000                     |       | 349,000                         |       |
| Finished goods                                    |       | 25,028,000                  |       | 25,597,000                      |       |
|                                              |       | 27,849,000                  |       | 28,155,000                      |       |
| Reserve for  obsolete and slow-moving inventories |       | (2,023,000                  | )          | (1,981,000                      | )          |
|                                              |       | $                           | 25,826,000 |                            | $          | 26,174,000 |   |

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

The changes in the carrying amounts of goodwill forthe six months ended June 30, 2006 are as follows:
| ** **                     | ** ** | **Consolidated** | ** ** | **Tools and other  products** | ** ** | **Hardware** | ** ** |
|--------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| Balance,  January 1, 2006 |       | $                | 23,821,000 |                                    | $          | 2,394,000    |       | $ | 21,427,000 |   |
| Acquisition of  Pacific Stair  |       | 943,000          |       | —                                  |       | 943,000      |       |
| Balance, June 30,  2006   |       | $                | 24,764,000 |                                    | $          | 2,394,000    |       | $ | 22,370,000 |   |

 

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Other intangible assets were asfollows:
| ** **                            | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Cost**                    | ** ** | **Accumulated  amortization**   | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** |
| Other intangible  assets:             |       |                        |       |                            |       |   |   |   |   |
| Customer relationships                |       | $                           | 10,960,000 |                            | $          | 2,588,000 |   | $ | 9,160,000 |   | $ | 2,119,000 |   |
| Vendor relationship                   |       | 890,000                     |       | 178,000                         |       | 890,000 |   | 134,000 |   |
| Non-compete and Employment agreements |       | 810,000                     |       | 638,000                         |       | 760,000 |   | 557,000 |   |
| Trademark/tradename                   |       | 2,140,000                   |       | —                          |       | 690,000 |   | — |   |
| Licensing                             |       | 105,000                     |       | 5,000                           |       | 105,000 |   | — |   |
| Total                                 |       | $                           | 14,905,000 |                            | $          | 3,409,000 |   | $ | 11,605,000 |   | $ | 2,810,000 |   |

Amortizationexpense for intangible assets subject to amortization was as follows:
| Three months ended June 30, | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| **2006**                                        | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| $                                               | 300,000    |                                              | $          | 276,000 |   | $ | 599,000 |   | $ | 553,000 |   |
|                                                 |            |                                                   |            |  |  |  |  |  |  |  |  |

Amortizationexpense for each of the twelve-month periods ending June 30, through thetwelve-month period ending June 30, 2011, is estimated to be as follows: 2007 - $1,109,000; 2008 - $666,000; 2009 -$666,000; 2010 - $666,000; and 2011 - $661,000. The weighted averageamortization period for intangible assets was 14.1 years at June 30, 2006and 10.96 years at December 31, 2005.

**NOTE 11 -WARRANTY LIABILITY**

TheCompany offers to its customers warranties against product defects for periodsranging from one to three years, depending on the specific product and terms ofthe customer purchase agreement. The Company’s typical warranties require it torepair or replace the defective products during the warranty period at no costto the customer. At the time the product revenue is recognized, the Companyrecords a liability for estimated costs under its warranties, which costs areestimated based on historical experience. The Company periodically assesses theadequacy of its recorded warranty liability and adjusts the amounts asnecessary. While the Company believes that its estimated liability for productwarranties is adequate, the estimated liability for the product warrantiescould differ materially from future actual warranty costs.

Changesin the Company’s warranty liability, included in other accrued liabilities,were as follows:
|                                                                     | ** ** | **Six months ended June 30,**                                                                                | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** |
| Balance,  beginning of period                                       |       | $                                                                                                                                | 419,000    |   | $ | 490,000 |   |
| Warranties  issued and changes in estimated pre-existing warranties |       | 329,000                                                                                                                          |       | 245,000 |   |
| Actual warranty  costs incurred                                     |       | (359,000                                                                                                                         | )          | (298,000 | ) |
| Balance, end of period                                              |       | $                                                                                                                                | 389,000    |   | $ | 437,000 |   |

** **

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**NOTE 12 - BUSINESS SEGMENTS**

The Company has organized its business into two reportable businesssegments: Tools and other products, and Hardware. The Company isorganized around these two distinct product segments, each of which has verydifferent end users. For reporting purposes, Florida Pneumatic and Franklin arecombined in the “Tools and other products” segment, while Woodmark, PacificStair and Nationwide are combined in the “Hardware” segment. Results forPacific Stair have been included since January 3, 2006. The Company evaluates segment performance basedprimarily on segment operating income. The accounting policies of each of thesegments are the same as those described in Note 1.

The following presents financialinformation by segment for the three-month and six-month periods ended June 30,2006 and 2005. Segment operating income excludes general corporate expenses,interest expense and income taxes. Identifiable assets are those assetsdirectly owned or utilized by the particular business segment.
| Three months ended June 30, 2006 | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                     |       | $                | 28,860,000 |                                    | $          | 9,565,000    |       | $ | 19,295,000 |   |
|                                                      |       |             |       |                                    |       |         |       |
| Segment  operating income                                 |       | 4,050,000        |       | $                                       | 591,000    |         | $          | 3,459,000 |   |
| General  corporate expense                                |       | (1,390,000       | )          |                                    |       |         |       |
| Interest expense  – net                              |       | (522,000         | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes  |       | $                | 2,138,000  |                                    |       |         |       |   |
|                                                      |       |             |       |                                    |       |         |       |
| Segment assets                                            |       | $                | 84,818,000 |                                    | $          | 23,838,000   |       | $ | 60,980,000 |   |
| Corporate assets  and assets of discontinued operations   |       | 5,493,000        |       |                                    |       |         |       |
| Total assets                                              |       | $                | 90,311,000 |                                    |       |         |       |   |

 
| Three months ended June 30, 2005 | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                     |       | $                | 28,130,000 |                                    | $          | 11,960,000   |       | $ | 16,170,000 |   |
|                                                      |       |             |       |                                    |       |         |       |
| Segment  operating income                                 |       | 4,251,000        |       | $                                       | 885,000    |         | $          | 3,366,000 |   |
| General  corporate expense                                |       | (1,240,000       | )          |                                    |       |         |       |
| Interest expense  – net                              |       | (486,000         | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes  |       | $                | 2,525,000  |                                    |       |         |       |   |
|                                                      |       |             |       |                                    |       |         |       |
| Segment assets                                            |       | $                | 83,000,000 |                                    | $          | 29,798,000   |       | $ | 53,202,000 |   |
| Corporate assets  and assets of discontinued operations   |       | 11,118,000       |       |                                    |       |         |       |
| Total assets                                              |       | $                | 94,118,000 |                                    |       |         |       |   |

 

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| Six months ended June 30, 2006  | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                               | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                    |       | $                | 55,710,000 |                                    | $          | 19,028,000   |       | $ | 36,682,000 |   |
|                                                     |       |             |       |                                    |       |         |       |
| Segment  operating income                                |       | 7,468,000        |       | $                                       | 1,301,000  |         | $          | 6,167,000 |   |
| General  corporate expense                               |       | (2,860,000       | )          |                                    |       |         |       |
| Interest expense  – net                             |       | (1,014,000       | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes |       | $                | 3,594,000  |                                    |       |         |       |   |

 
| Six months ended June, 2005          | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| ** **                                               | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| Revenues from  unaffiliated customers                    |       | $                | 52,454,000 |                                    | $          | 22,074,000   |       | $ | 30,380,000 |   |
|                                                     |       |             |       |                                    |       |         |       |
| Segment  operating income                                |       | 7,634,000        |       | $                                       | 1,907,000  |         | $          | 5,727,000 |   |
| General  corporate expense                               |       | (2,324,000       | )          |                                    |       |         |       |
| Interest expense  – net                             |       | (901,000         | )          |                                    |       |         |       |
| Earnings from  continuing operations before income taxes |       | $                | 4,409,000  |                                    |       |         |       |   |

 

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**P&FINDUSTRIES, INC. AND SUBSIDIARIES**

**Item 2.                    Management’s Discussion andAnalysis 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.and subsidiaries. The Company and its representatives may, from time to time,make written or verbal forward-looking statements, including statementscontained in the Company’s filings with the Securities and Exchange Commissionand in its reports to stockholders. Generally, the inclusion of the words “believe,”“expect,” “intend,” “estimate,” “anticipate,” “will,” and their opposites andsimilar expressions identify statements that constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934 and that areintended to come within the safe harbor protection provided by those sections. Any forward-looking statements contained herein,including those related to the Company’s future performance, are based upon theCompany’s historical performance and on current plans, estimates andexpectations. All forward-looking statements involve risks anduncertainties. These risks and uncertaintiescould cause the Company’s actual results for the 2006 fiscal year and beyond todiffer materially from those expressed in any forward-looking statement made byor on behalf 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 31,2005 in response to Item 1A. to Part I of Form 10-K. Forward-looking statements speak only as of thedate on which they are made. The Company undertakes no obligation to updatepublicly or revise any forward-looking statement, whether as a result of newinformation, future developments or otherwise.

**Business**

P&FIndustries, Inc. (“P&F”) is a Delaware corporation incorporated on April 19,1963. P&F conducts its business operations through two of its wholly-ownedsubsidiaries: Florida Pneumatic Manufacturing Corporation (“Florida Pneumatic”)and Countrywide Hardware, Inc. (“Countrywide”). P&F and itssubsidiaries are herein referred to collectively as the “Company.” In addition,the words “we”, “our” and “us” refer to the Company.

Florida Pneumatic is engaged inthe importation, manufacture and sale of pneumatic hand tools, primarily forthe industrial, retail and automotive markets, and the importation and sale ofcompressor air filters. Florida Pneumatic also markets, through its BerkleyTool division (“Berkley”), a line of pipe cutting and threading tools, wrenchesand replacement electrical components for a widely-used brand of pipe cuttingand threading machines. In addition, through its Franklin Manufacturing (“Franklin”)division, Florida Pneumatic imports a line of door and window hardware.Countrywide conducts its business operations through Nationwide Industries, Inc.(“Nationwide”) and through Woodmark International, L.P. (“Woodmark”), a limitedpartnership between Countrywide and WILP Holdings, Inc., a subsidiary ofCountrywide. Nationwide is an importer and manufacturer of door, window andfencing hardware. Woodmark is an importer of builders’ hardware,including staircase components and kitchen and bath hardware and accessories.In January 2006, Countrywide acquiredsubstantially all of the operating assets of Pacific Stair Products, Inc.(“Pacific Stair”). Pacific Stair is a manufacturer of premium stair railproducts and a distributor of Woodmark’s staircase components to the buildingindustry, primarily in southern California and the southwestern region of theUnited States.

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The Company’s wholly-owned subsidiary, Embassy Industries, Inc. (“Embassy”), wasengaged 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-realestate assets. The Company’s wholly-owned subsidiary, Green Manufacturing, Inc.(“Green”), was primarily engaged in the manufacture, development and sale ofheavy-duty welded custom designed hydraulic cylinders until it exited thatbusiness in December 2004 through the sale of certain assets. Green alsomanufactured a line of access equipment for the petro-chemical industry untilit exited that business in February 2005 through the sale of certainassets and a line of post hole digging equipment for the agricultural industryuntil it exited that business in July 2005 through the sale of certainassets. Green has effectively ceased all operating activities. The assets andliabilities and results of operations of Embassy and Green have been segregatedand reported separately as discontinued operations in the ConsolidatedFinancial Statements. Note 12 to the Notes to Consolidated Condensed FinancialStatements presents financial information for the segments of the Company’sbusiness.

**Overview**

On January 3, 2006, Pacific Stair acquired certain assetscomprising the business of the former Pacific Stair Products, and assumedcertain related liabilities. The Company’s consolidatedresults of operations include the results of operations for Pacific Stair forthe three and six months ended June 30, 2006 within its hardware businesssegment. In addition, the Company’s consolidated results of operations presentEmbassy and Green as discontinued operations.

Consolidated revenues forthe quarter ended June 30, 2006 increased $730,000, or 2.6%, from $28,130,000to $28,860,000. Revenues increased approximately $3,125,000, or 19.3%, atCountrywide, which includes revenues at Woodmark, Pacific Stair and Nationwide.Woodmark had second quarter revenues of $11,820,000, increasing $1,900,000, or19.2%. Newly-acquired Pacific Stair reported second quarter revenues of$1,691,000. Nationwide reported revenues of $5,785,000, decreasing $466,000, or7.5%. Revenues at Florida Pneumatic for the second quarter decreased$2,395,000, or 20.0%, to $9,565,000. Consolidated gross profit increased$276,000, or 3.0%, for the second quarter primarily due to an increase inrevenues, which included Pacific Stair in 2006. Consolidated earnings fromcontinuing operations decreased $160,000, or 11.1%, from $1,443,000 to $1,284,000for the quarter ended June 30, 2006.

**Critical Accounting Policies and Estimates**

The Company prepares itsconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America. Certain of these accountingpolicies require the Company to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities, revenues and expenses. On anongoing basis, the Company evaluates estimates, including those related to baddebts, inventory reserves, goodwill and intangible assets and warrantyreserves. The Company bases its estimates on historical data and experience,when available, and on various other assumptions that are believed to bereasonable under the circumstances, the combined results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates.

There have been nomaterial changes in the Company’s critical accounting policies and estimatesfrom those discussed in Item 7 of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005.

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**ACQUISITION**

For acquisitions, resultsof operations are included in the Consolidated Condensed Financial Statementsfrom the date of acquisition.

Pacific Stair Products, Inc.

Pursuant to an AssetPurchase Agreement (the “PSP APA”), dated December 20, 2005, betweenPacific Stair Products, a California corporation (“Old PSP”), and Pacific StairProducts, Inc., a newly-formed Delaware corporation (“Pacific Stair”) anda wholly-owned subsidiary of Countrywide, effective January 3, 2006,Pacific Stair purchased substantially all of the operating assets of Old PSP.The total purchase price for the assets was approximately $5,233,000, subjectto adjustments, plus the assumption of certain liabilities and obligations byPacific Stair. The assets purchased pursuant to the PSP APA include, amongothers, accounts receivable, inventory, machinery and equipment and certainintangibles. Certain assets were retained by Old PSP including cash and titleto any real property. The purchase price, including direct acquisition costs,represents a premium over the fair value of the assets purchased ofapproximately $4,243,000, which will be allocated among goodwill and otherintangible assets. Pacific Stair is a manufacturer of premium stair railproducts and a distributor of staircase components to the building industry,primarily in southern California and the southwestern region of the UnitedStates. As a result of this transaction, Countrywide has increased itspurchasing power and geographic distribution. The acquisition was financedthrough the Company’s credit facility with Citibank. The consolidated condensed financial statements presented hereininclude the results of operations for Pacific Stair for the period from January 3,2006 to June 30, 2006.

As part of the acquisition,the Company recorded approximately $3,300,000 in other identifiable intangibleassets, principally related to the value of customer relationships and atradename, and approximately $943,000 of goodwill, including direct acquisitioncosts, through June 30, 2006.

**DISCONTINUED OPERATIONS**

Embassy Industries, Inc.

Pursuant to an AssetPurchase Agreement (the “Embassy APA”), 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 ofits operating assets to EMI. The assets sold pursuant to the Embassy APAinclude, among others, machinery and equipment, inventory, accounts receivableand certain intangibles. Certain assets were retained by Embassy, including,but not limited to, cash and title to any real property owned by Embassy at theconsummation of the sale to EMI. The consideration paid by EMI for the assetsacquired pursuant to the Embassy APA was approximately $8,433,000 plus the assumptionof certain liabilities and obligations of Embassy by EMI.

Pursuant to a Lease,dated as of October 11, 2005, between Embassy, as landlord and EMI, astenant (the “EMI Lease”), Embassy agreed to lease certain space (approximately60,000 rentable square feet) in the building located at 300 Smith Street,Farmingdale, New York to EMI in connection with the operation of EMI’sbusiness, at an annual rental rate of $480,000, payable in monthly installmentsof $40,000 each. The term of the EMI Lease was for a period of six (6) monthscommencing October 11, 2005 and terminating April 10, 2006; providedhowever, that, in the event EMI served notice on Embassy by December 31,2005, the Lease could be extended on a month to month basis to, and including, June 

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30, 2006. EMI served notice on Embassy to extend theEMI Lease through May 31, 2006.

Embassyhas effectively ceased all operating activities. The Company recognizeda gain on the sale of these assets of approximately $1,467,000, net of taxes,during the fourth quarter of fiscal 2005.

On July 24, 2006,Embassy received a letter (the “Purchaser Letter”) from counsel to J. D’Addario &Company, Inc., a New York corporation (“Purchaser”), purporting toterminate that certain contract entered into by Embassy and Purchaser on January 13,2006 (the “Agreement”, and as amended, the “Contract of Sale”). Pursuant to theContract of Sale, Embassy agreed to sell its Farmingdale, New York premises(the “Farmingdale Premises”) to Purchaser for a purchase price of $6,403,000.

The sale of theFarmingdale Premises was contingent upon completion of due diligence and otherconditions set forth in the Contract of Sale, including, without limitation,that upon the expiration of the Investigation Period (as defined in the Contractof Sale), Embassy was to proceed with certain environmental remediation at theFarmingdale Premises (the “Required Environmental Remediation”) to thesatisfaction of the Suffolk County Department of Health Services (“SCDHS”), toobtain a “No Further Action” letter from SCDHS, and to provide a copy of saidletter to Purchaser upon Embassy’s receipt thereof.

Upon the expiration ofthe Investigation Period, Embassy completed the Required EnvironmentalRemediation. On May 30, 2006, SCDHS issued a letter (the “SCDHS Letter”)stating that no further remediation will be required by SCDHS at this time withrespect to the Required Environmental Remediation. The SCDHS Letter also notedthat laboratory data provided for the upgradient groundwater sample (the “Sample”)indicated that groundwater contamination exists, and that, due to thesignificant exceedences noted, this information was reported to the New YorkState Department of Environmental Conservation (“NYSDEC”) Spills Unit, and aNYSDEC Spill Number (the “DEC Spill Number”) was assigned. Embassy delivered acopy of the SCDHS Letter to Purchaser pursuant to the terms of the Contract ofSale.

The Sample wascontaminated with petroleum, and, to the Company’s knowledge, no petroleumproducts were used, stored or handled by Embassy at the Farmingdale Premises ator near the location where the Sample was collected. The Sample was collectedfrom an upgradient location near the northern border of the FarmingdalePremises, which is in close proximity to a neighboring property thatexperienced a petroleum release. Shortly following receipt of the SCDHS Letter,NYSDEC verbally advised Embassy that it approved an investigation work-plansubmitted by Embassy; the purpose of the investigation was to confirm that thecontamination does not originate at the Farmingdale Premises. The investigationwas completed on August 2, 2006 and the investigation results, which confirmedthat the source of the petroleum contamination is not the Farmingdale Premises,were submitted to the NYSDEC on August 7, 2006. On August 11, 2006, the NYSDECadvised Embassy that, based on the results of the investigation, it is apparentthat the Farmingdale Premises is not the source of groundwater contaminationthat was discovered based on the Sample, and that therefore the NYSDEC databasehas been modified to remove the Farmingdale Premises as the source of thecontamination.

The Purchaser Letterpurports to terminate the Contract of Sale based upon Purchaser’s assertionthat the SCDHS Letter does not constitute a “No Further Action” letter asrequired by the Contract of Sale, and demands that the escrow agent return thedownpayment with accrued interest, and that Purchaser be reimbursed for thecosts of survey and title examination.

Embassy has informed Purchaserthat, in light of the contents of the SCDHS Letter, Purchaser’s purportedtermination of the Contract of Sale is without effect, and that Purchaser is indefault of its obligation to consummate the purchase of the FarmingdalePremises under the terms of the Contract of Sale. On August 2, 2006, Purchaserinstituted an action against Embassy in the Supreme Court of the State of NewYork, County of Suffolk, for breach of contract and return of downpayment,seeking $650,000, together with costs of title and survey and interest thereon,and the cost of the action. Embassy believes the action is without merit andintends to vigorously defend it.

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Green Manufacturing, Inc.–Agricultural ProductsDivision

Pursuant to an AssetPurchase Agreement (the “Agricultural APA”), dated as of July 14, 2005,between Green and Benko Products, Inc. (“Benko”), Green sold certain ofits assets comprising its Agricultural Products Division (the “AgriculturalDivision”) to Benko. The assets sold pursuant to the Agricultural APA include,among others, certain machinery and equipment. Certain assets of theAgricultural Division were retained by Green, including, but not limited to,certain of the Agricultural Division’s accounts receivable and inventoriesexisting at the consummation of the sale to Benko (the “Agricultural Closing”).

The purchase price paidby Benko in consideration for the assets acquired pursuant to the AgriculturalAPA was $530,000, consisting of (a) a payment to Green at AgriculturalClosing of $225,000; (b) $25,000 payable pursuant to the terms of aPromissory Note (“Agricultural Note 1”), dated July 14, 2005, payable inequal monthly amounts over a five (5) month period commencing as of theAgricultural Closing; and (c) $280,000 payable pursuant to the terms of aPromissory Note (collectively with Agricultural Note 1, the “Agricultural Notes”),dated July 14, 2005, payable in equal monthly amounts over a four (4) yearperiod commencing as of the Agricultural Closing. In addition, Benko assumedcertain of Green’s contractual obligations. The obligations of Benko under theAgricultural APA and the Agricultural Notes are guaranteed by each of aprincipal shareholder and an affiliate of Benko, and partially secured bycertain collateral.

In connection with thetransaction, Green and Benko entered into an agreement which provides for Benkoto purchase from Green 100% of Benko’s requirements for products of the typethat constitute part of Green’s inventory of raw materials and finished goodsas of the acquisition date with all purchases by Benko being binding andnon-cancelable at pre-established prices. The term was for a period of one yearfrom the acquisition date. At June 30, 2006, all of Green’s inventory waspurchased by Benko.

The Company recognized a gainon the sale of these assets of approximately $312,000, net of taxes, in fiscal2005.

Green Manufacturing, Inc.–Access Division

Pursuant to an AssetPurchase Agreement (the “Access APA”), dated as of February 2, 2005,between Green and Benko Products, Inc. (“Benko”), Green sold certain ofits assets comprising its Access Division (the “Access Division”) to Benko. Theassets sold pursuant to the Access APA include, among others, certain machineryand equipment, accounts receivable (“Purchased Receivables”), inventory,intellectual property and other intangibles. Certain assets of the AccessDivision were retained by Green, including, but not limited to, certain of theAccess Division’s accounts receivable existing at the consummation of the saleto Benko (the “Access Closing”).

The purchase price paidby Benko in consideration for the assets acquired pursuant to the Access APA,giving effect to certain adjustments, was approximately $1,756,655, consistingof (a) a payment to Green at Access Closing of approximately $880,069; (b) $755,724payable pursuant to the terms of a Promissory Note (“Access Note 1”), dated February 2,2005, payable in various amounts over a twenty-one (21) month period commencingas of the Access Closing; and (c) $120,862 payable pursuant to the termsof a Promissory Note (collectively with Access Note 1, the “Access Notes”),dated February 2, 2005, payable in various amounts over a four (4) monthperiod commencing as of the Access Closing. 

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Benko agreed to pay additional consideration on anannual basis for the two (2) successive twelve (12) month periodscommencing as of the Access Closing, dependent on certain sales by Benko,subject to certain other conditions. In addition, Benko assumed certain ofGreen’s contractual obligations. The obligations of Benko under the Access APAand the Access Notes are guaranteed by each of a principal shareholder and anaffiliate of Benko, and partially secured by certain collateral.

Benko has withheldcertain payments regarding its outstanding Access Note as a result of adisagreement regarding certain representations made by the Company in theAccess APA. As such, the Company recorded a reserve of $150,000 at December 31,2005. The Company and Benko are negotiating the rescheduling of payments underboth the Access Note and the outstanding Agricultural Note and the resolutionof this matter.

The Company recognized again on the sale of these assets of approximately $71,000, net of taxes, in fiscal2005.

The following amountsrelated to Embassy and Green have been segregated from the Company’s continuingoperations and are reported as assets held for sale and assets and liabilitiesof discontinued operations in the consolidated condensed balance sheets:

|                                                                   | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Assets held for  sale and assets of discontinued operations:      |       |                        |       |                            |       |
| Prepaid expenses                                                  |       | $                           | 304,000    |                            | $          | 77,000 |   |
| Assets held for  sale                                             |       | 576,000                     |       | 623,000                         |       |
| Total assets  held for sale and assets of discontinued operations |       | $                           | 880,000    |                            | $          | 700,000 |   |
|                                                              |       |                        |       |                            |       |
| Liabilities of  discontinued operations:                          |       |                        |       |                            |       |
| Accounts payable  and accrued expenses                            |       | $                           | 559,000    |                            | $          | 991,000 |   |
| Mortgage payable                                                  |       | 1,311,000                   |       | 1,367,000                       |       |
| Total liabilities of  discontinued operations                     |       | $                           | 1,870,000  |                            | $          | 2,358,000 |   |

Results of operations forEmbassy and Green are included from the beginning of each fiscal periodpresented through the respective dates of asset disposition, and have beensegregated from continuing operations and reflected as discontinued operationsapproximately as follows: 
|                                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues                                                             |       | $                                               | —     |                                          | $          | 2,761,000 |   | $ | — |   | $ | 5,924,000 |   |
|                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Earnings (loss)  from operation of discontinued operations, before taxes |       | $                                               | 73,000     |                                          | $          | 64,000 |   | $ | 76,000 |   | $ | (268,000 | ) |
| Income tax  (expense) benefit                                            |       | (30,000                                         | )          | (22,000                                       | )          | (31,000 | ) | 90,000 |   |
| Earnings (loss)  from operation of discontinued operations               |       | 43,000                                          |       | 42,000                                        |       | 45,000 |   | (178,000 | ) |
| Gain on sale of  discontinued operations, before taxes                   |       | —                                          |       | —                                        |       | — |   | 107,000 |   |
| Income tax  expense                                                      |       | —                                          |       | —                                        |       | — |   | (36,000 | ) |
| Gain on sale of  discontinued operations                                 |       | —                                          |       | —                                        |       | — |   | 71,000 |   |
| Earnings (loss) from  discontinued operations                            |       | $                                               | 43,000     |                                          | $          | 42,000 |   | $ | 45,000 |   | $ | (107,000 | ) |

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**RESULTS OF OPERATIONS**

**Quarters ended June 30, 2006 and 2005**

**Revenues**

Revenues for the quartersended June 30, 2006 and 2005 were approximately as follows:
| Three months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|---------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2006**                                    |       | $                | 28,860,000 |                                    | $          | 9,565,000    |       | $ | 19,295,000 |   |
| ** **                                  |       |             |       |                                    |       |         |       |
| **2005**                                    |       | $                | 28,130,000 |                                    | $          | 11,960,000   |       | $ | 16,170,000 |   |
| ** **                                  |       |             |       |                                    |       |         |       |
| **% increase (decrease)**                   |       | 2.6              | %          | (20.0                                   | )%         | 19.3         | %          |

Revenues from tools andother products decreased due primarily to approximately $1,893,000 less inretail promotions in the period, as well as a decrease in base sales ofapproximately $782,000. Base sales decreased as a result of decreasedpurchasing activity of approximately $722,000 from a significant customer aspart of a program to reduce its overall inventory levels, which was furtherimpacted by a $60,000 decrease in base sales from another significant customer.Partially offsetting these decreases were incremental revenues from newproducts in the retail channel of approximately $295,000 and increases inBerkley revenues of approximately $199,000 due to better market penetration.

Revenues from hardwareincreased at Woodmark and include revenues from the recently-acquired PacificStair as of January 3, 2006. Woodmark’s revenues increased $1,900,000, or19.2%. Revenues from the sale of staircase components continued to increase,benefiting from better customer penetration. Further, revenues in our kitchenand bath products sold into the mobile home and remodeling markets haveincreased approximately $684,000, or 38.2%, as we have strengthenedrelationships with certain customers. Pacific Stair’s revenues were $1,691,000for the second quarter. Nationwide’s revenues decreased by approximately$466,000, or 7.5%, primarily attributable to a decrease of approximately$289,000 and $123,000 in sales of fencing and patio products, respectively.

All revenues are generated in U.S. dollars and are notimpacted by changes in foreign currency exchange rates.

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**Gross Profits**

Gross profits for the quarters ended June 30, 2006 and 2005 wereapproximately as follows:
| Three months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|---------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2006**                                    |       | $                | 9,408,000  |                                    | $          | 2,998,000    |       | $ | 6,410,000 |   |
| ** **                                  |       | 32.6             | %          | 31.4                                    | %          | 33.2         | %          |
| ** **                                  |       |             |       |                                    |       |         |       |
| **2005**                                    |       | $                | 9,132,000  |                                    | $          | 3,327,000    |       | $ | 5,805,000 |   |
| ** **                                  |       | 32.5             | %          | 27.8                                    | %          | 35.9         | %          |

The increase in the grossprofit percentage from tools and other products was due primarily to a lowerproportionate amount of retail promotional sales in the current period, whichhistorically have lower average margins, versus the prior-year period and thestrength of the U.S. dollar in relation to the Japanese yen and the Taiwandollar compared to the prior-year period. The decrease in the gross profitpercentage from hardware was due primarily to some cost increases from Asiansuppliers due to increases in the cost of metals, competitive pricing pressureson certain stair products and the inclusion of Pacific Stair, which operates ata lower gross margin than the rest of the group. The gross margin percentagedecrease was partially offset by a favorable product mix in fencing revenuesand a shift by Nationwide to high-quality, lower-cost suppliers for someproducts.

**Selling, General andAdministrative Expenses**

Consolidated selling,general and administrative (“SG&A”) expenses increased $628,000, or 10.3%,from approximately $6,120,000 to approximately $6,748,000. SG&A expensesgrew at a faster rate than the consolidated revenue increase for the quarter.This expense growth was driven by several factors, including share-basedcompensation expense, certain non-recurring professional and legal fees, theinclusion of Pacific Stair expenses in the 2006 period, increased freight costsdue to the increase in the price of oil and planned increases in sales and marketingexpenses that are intended to generate additional revenue in the comingperiods. SG&A expenses as a percentage of revenues increased from 21.8% to23.4%.

**Interest - Net**

Net interest expenseincreased $36,000, or 7.4%, from approximately $486,000 to approximately$522,000, due primarily to higher average interest rates. Interest expense onborrowings under the Company’s revolving credit loan facility increased byapproximately $41,000, as lower average borrowings were adversely impacted byhigher average interest rates. Interest expense on borrowings under the termloan facility decreased by approximately $20,000 due to lower averageborrowings during the period due to repayments, offset by higher averageinterest rates. Interest expense on Woodmark’s acquisition-related notesincreased by approximately $11,000 due to higher average interest rates.

**Income Taxes**

The effective tax ratesapplicable to earnings from continuing operations for the quarters ended June 30,2006 and 2005 were 39.9% and 42.8%, respectively. The decrease in the effectivetax rate is attributable to the deductibility of certain compensation expensesin 2006 that were not deductible in 2005.

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** **

**Six-month periods ended June 30, 2006 and2005**

**Revenues**

Revenues for thesix-month periods ended June 30, 2006 and 2005 were approximately asfollows:
| Six months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2006**                                  |       | $                | 55,710,000 |                                    | $          | 19,028,000   |       | $ | 36,682,000 |   |
| ** **                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **2005**                                  |       | $                | 52,454,000 |                                    | $          | 22,074,000   |       | $ | 30,380,000 |   |
| ** **                                | ** ** | ** **       | ** ** | ** **                              | ** ** | ** **   | ** ** |
| **% increase (decrease)**                 |       | 6.2              | %          | (13.8                                   | )%         | 20.7         | %          |

Revenues from tools andother products decreased due primarily to approximately $2,824,000 less inretail promotions in the period, as well as a decrease in base sales ofapproximately $488,000. Base sales decreased as a result of decreasedpurchasing activity of approximately $691,000 from a significant customer aspart of a program to reduce its overall inventory levels, which was partiallyoffset by a $203,000 increase in base sales from another significant customer.Decreases in revenues of approximately $213,000 at Franklin were due primarilyto decreased shipments to a few customers related to weak in-store sales andsupply-related issues. Partially offsetting these decreases were incrementalrevenues from new products in the retail channel of approximately $261,000 andincreases in Berkley revenues of approximately $301,000 due to better marketpenetration.

Revenues from hardwareincreased at both Woodmark and Nationwide and include revenues from therecently-acquired Pacific Stair as of January 3, 2006. Woodmark’s revenuesincreased $2,888,000, or 14.5%. Revenues from the sale of staircase componentscontinued to increase, benefiting from better customer penetration. Further,revenues in our kitchen and bath products sold into the mobile home andremodeling markets have increased approximately $905,000, or 23.0%, as we havestrengthened relationships with certain customers. Pacific Stair’s revenueswere $3,358,000 for the first half of fiscal 2006. Moreover, Nationwide’srevenues increased slightly by approximately $57,000, primarily attributable toan increase of approximately $279,000 in sales of fencing products, partiallyoffset by a decrease in revenues in the OEM business of approximately $135,000.

All revenues are generated in U.S. dollars and are notimpacted by changes in foreign currency exchange rates.

**Gross Profits**

Gross profits for thesix-month periods ended June 30, 2006 and 2005 were approximately asfollows:
| Six months ended  June 30, | ** ** | **Consolidated** | ** ** | **Tools and  other products** | ** ** | **Hardware** | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------------------------------|------------|--------------|------------|
| **2006**                                  |       | $                | 17,656,000 |                                    | $          | 6,063,000    |       | $ | 11,593,000 |   |
| ** **                                |       | 31.7             | %          | 31.9                                    | %          | 31.6         | %          |
| ** **                                |       |             |       |                                    |       |         |       |
| **2005**                                  |       | $                | 16,847,000 |                                    | $          | 6,467,000    |       | $ | 10,380,000 |   |
| ** **                                |       | 32.1             | %          | 29.3                                    | %          | 34.2         | %          |

 

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The increase in the grossprofit percentage from tools and other products was due primarily to a lowerproportionate amount of retail promotional sales in the current period, whichhistorically have lower average margins, versus the prior-year period and thestrength of the U.S. dollar in relation to the Japanese yen and the Taiwandollar compared to the prior-year period. The decrease in the gross profitpercentage from hardware was due primarily to some cost increases from Asiansuppliers due to increases in the cost of metals, competitive pricing pressureson certain stair products and the inclusion of Pacific Stair, which operates ata lower gross margin than the rest of the group. The gross margin percentagedecrease was partially offset by a favorable product mix in fencing revenuesand a shift by Nationwide to high-quality, lower-cost suppliers for someproducts.

**Selling, General andAdministrative Expenses**

Consolidated selling,general and administrative (“SG&A”) expenses increased $1,511,000, or13.1%, from approximately $11,537,000 to approximately $13,048,000. SG&Aexpenses grew at a faster rate than the consolidated revenue increase for thefirst half of 2006. This unusual expense growth was driven by several factors,including certain corporate non-recurring professional and tax fees, thenon-recurring cost of the move of the Company’s corporate headquarters,increased freight costs and planned increases in sales and marketing expensesthat are intended to generate additional revenue in the coming periods. SG&Aexpenses as a percentage of revenues increased from 22.0% to 23.4%.

**Interest - Net**

Net interest expenseincreased $113,000, or 12.5%, from approximately $901,000 to approximately$1,014,000, due primarily to higher average interest rates. Interest expense onborrowings under the Company’s revolving credit loan facility increased byapproximately $82,000, as lower average borrowings were adversely impacted byhigher average interest rates. Interest expense on trade financing at FloridaPneumatic increased approximately $18,000 as a result of higher interest rates.Interest expense on borrowings under the term loan facility decreased byapproximately $19,000 due to lower average borrowings during the period due torepayments, offset by higher average interest rates. Interest expense onWoodmark’s acquisition-related notes increased by approximately $21,000 due tohigher average interest rates.

**Income Taxes**

The effective tax ratesapplicable to earnings from continuing operations for the six-month periods endedJune 30, 2006 and 2005 were 40.0% and 42.0%, respectively. The decrease inthe effective tax rate is attributable to the deductibility of certaincompensation expenses in 2006 that were not deductible in 2005.

**LIQUIDITY ANDCAPITAL RESOURCES**

The Company’s cash flows from operations can besomewhat cyclical, typically with the greatest demand in the second and thirdquarters followed by positive cashflows in the fourth quarter as receivables and inventories trend down. Due toits strong asset base, predictable cash flows and favorable bankingrelationships, the Company believes it has adequate access to capital, if andwhen needed. The Company 

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monitors average days salesoutstanding, inventory turns and capital expenditures to project liquidityneeds and evaluate return on assets employed.

The Company gauges its liquidityand financial stability by the measurements shown in the following table:

|                           | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Working Capital           |       | $                           | 20,589,000 |                            | $          | 27,981,000 |   |
| Current Ratio             |       | 1.8 to 1                    |       | 2.51 to 1                       |       |
| Shareholders’ Equity |       | $                           | 49,805,000 |                            | $          | 47,716,000 |   |

On January 3, 2006,Pacific Stair acquired certain assets comprising the business of the formerPacific Stair Products and assumed certain related liabilities.

On June 30, 2004,Woodmark acquired certain assets comprising the business of the former WoodmarkInternational L.P. and its wholly-owned subsidiary, the former Stair House, Inc.,and assumed certain related liabilities.

Inconnection with the Woodmark acquisition transaction, 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 basedon increases 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 maydemand payment as of June 30, 2009 in an amount equal to 40% of theincrease. Any such additional payments will be treated as additions togoodwill.

In connection with thesale of certain assets of Embassy in October 2005, the Company recorded areceivable of approximately $1,233,000, comprised of a working capitaladjustment of approximately $433,000 and approximately $800,000 of escrowmonies due, subject to certain conditions of release. In January 2006, theCompany received approximately $833,000 in cash relating to the working capitaladjustment and a partial release of escrow monies. The balance of the escrowmonies due are expected to be paid to the Company in June 2007.

Embassyparticipated in a multi-employer pension plan until it sold substantially allof its operating assets in October 2005. This plan provided definedbenefits to all of its union workers. Contributions to this plan weredetermined by the union contract. The Company does not administer the planfunds and does not have any control over the plan funds. As a result of Embassy’swithdrawal from the plan, it has estimated and recorded a withdrawal liabilityof approximately $279,000, which is payable in quarterly installments ofapproximately $8,200 from May 2006 through February 2026.

On July 24, 2006,Embassy received a letter (the “Purchaser Letter”) from counsel to J. D’Addario &Company, Inc., a New York corporation (“Purchaser”), purporting toterminate that certain contract entered into by Embassy and Purchaser on January 13,2006 (the “Agreement”, and as amended, the “Contract of Sale”). Pursuant to theContract of Sale, Embassy agreed to sell its Farmingdale, New York premises(the “Farmingdale Premises”) to Purchaser for a purchase price of $6,403,000.

The sale of theFarmingdale Premises was contingent upon completion of due diligence and otherconditions set forth in the Contract of Sale, including, without limitation,that upon the expiration of the 

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Investigation Period (as defined in the Contract ofSale), Embassy was to proceed with certain environmental remediation at theFarmingdale Premises (the “Required Environmental Remediation”) to thesatisfaction of the Suffolk County Department of Health Services (“SCDHS”), toobtain a “No Further Action” letter from SCDHS, and to provide a copy of saidletter to Purchaser upon Embassy’s receipt thereof.

Upon the expiration ofthe Investigation Period, Embassy completed the Required EnvironmentalRemediation. On May 30, 2006, SCDHS issued a letter (the “SCDHS Letter”)stating that no further remediation will be required by SCDHS at this time withrespect to the Required Environmental Remediation. The SCDHS Letter also notedthat laboratory data provided for the upgradient groundwater sample (the “Sample”)indicated that groundwater contamination exists, and that, due to thesignificant exceedences noted, this information was reported to the New YorkState Department of Environmental Conservation (“NYSDEC”) Spills Unit, and aNYSDEC Spill Number (the “DEC Spill Number”) was assigned. Embassy delivered acopy of the SCDHS Letter to Purchaser pursuant to the terms of the Contract ofSale.

TheSample was contaminated with petroleum, and, to the Company’s knowledge, nopetroleum products were used, stored or handled by Embassy at the FarmingdalePremises at or near the location where the Sample was collected. The Sample wascollected from an upgradient location near the northern border of theFarmingdale Premises, which is in close proximity to a neighboring propertythat experienced a petroleum release. Shortly following receipt of the SCDHSLetter, NYSDEC verbally advised Embassy that it approved an investigationwork-plan submitted by Embassy; the purpose of the investigation was to confirmthat the contamination does not originate at the Farmingdale Premises. Theinvestigation was completed on August 2, 2006 and the investigation results,which confirmed that the source of the petroleum contamination is not theFarmingdale Premises, were submitted to the NYSDEC on August 7, 2006. OnAugust 11, 2006, the NYSDEC advisedEmbassy that, based on the results of the investigation,  it is apparent that the Farmingdale Premises is not the source ofgroundwater contamination that was discovered based on the Sample, and thattherefore the NYSDEC database has been modified to remove the FarmingdalePremises as the source of the contamination.

The Purchaser Letterpurports to terminate the Contract of Sale based upon Purchaser’s assertionthat the SCDHS Letter does not constitute a “No Further Action” letter asrequired by the Contract of Sale, and demands that the escrow agent return thedownpayment with accrued interest, and that Purchaser be reimbursed for thecosts of survey and title examination.

Embassy has informedPurchaser that, in light of the contents of the SCDHS Letter, Purchaser’spurported termination of the Contract of Sale is without effect, and thatPurchaser is in default of its obligation to consummate the purchase of theFarmingdale Premises under the terms of the Contract of Sale. On August 2, 2006, Purchaser institutedan action against Embassy in the Supreme Court of the State of New York, Countyof Suffolk, 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 to vigorouslydefend it.

Cash decreased $270,000,from $1,772,000 as of December 31, 2005 to $1,502,000, as of June 30,2006. The Company’s debt levels increased, from $26,631,000 at December 31,2005 to $28,116,000 at June 30, 2006, primarily to fund working capitalneeds and the acquisition of Pacific Stair. The Company’s total percent of debtto total book capitalization (debt plus equity) increased from 35.8% at December 31,2005 to 36.1% at June 30, 2006.

Cash provided by (usedin) operating activities of continuing operations for the six-month periodsended June 30, 2006 and 2005 were approximately $5,325,000 and$(1,480,000), respectively. The Company believes that cash on hand derived fromoperations and cash available through borrowings under its credit facilitieswill be sufficient to allow the Company to meet its foreseeable working capitalneeds.

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During the six months ended June 30, 2006, grossaccounts receivable increased by approximately $655,000. Increases (decreases)were approximately $(2,642,000) and $3,297,000 at Florida Pneumatic andCountrywide, respectively. The decrease in Florida Pneumatic’s gross accountsreceivable resulted from payments received from a major customer from a largepromotion that occurred in the latter part of 2005. The increase at Countrywidewas due primarily to increase in revenues of Woodmark and Nationwide during thecurrent six-month period, as well as the inclusion of Pacific Stair, whichreported approximately $316,000 in gross accounts receivable.

During the six months ended June 30, 2006,inventories decreased by approximately $687,000. Increases (decreases) wereapproximately $(799,000) and $112,000 at Florida Pneumatic and Countrywide,respectively. Inventory levels at Florida Pneumatic decreased as a result ofthe timing of inventory purchases. The increase at Countrywide was dueprimarily to the inclusion of Pacific Stair inventory of approximately $838,000and increases at Nationwide of approximately $595,000, offset by a decrease atWoodmark of approximately $1,321,000 which continues to sell throughinventories it had built up at year-end anticipating a supplier shut-down andrelocation in the first quarter of 2006.

During the six months ended June 30, 2006,short-term borrowings increased by $3,500,000, primarily from the acquisitionof Pacific Stair and the timing of working capital requirements.

During the six months ended June 30, 2006, accountspayable increased by approximately $1,567,000. Increases (decreases) wereapproximately $1,743,000 and $(176,000) at Florida Pneumatic and Countrywide,respectively. The increase at Florida Pneumatic was due primarily to inventorypurchases from a major foreign supplier that has granted more favorable paymentterms. The decrease at Countrywide was due primarily to the decrease atWoodmark of approximately $231,000, primarily resulting from the timing of certaininterest payments and inventory purchases, as well as the inclusion of PacificStair which reported approximately $65,000 in accounts payable.

On June 30, 2004, in conjunction with the Woodmarkacquisition transaction, the Company entered into a credit agreement withCitibank and another bank. This agreement, as amended from time to time,provides the Company with various credit facilities, including revolving creditloans, term loans for acquisitions and a foreign exchange line. The credit agreement expires on August 31, 2006and is subject to annual review by the lending banks.

The revolving credit loan facility provides amaximum of $12,000,000, with various sublimits, for direct borrowings, lettersof credit, bankers’ acceptances and equipment loans. There are no commitmentfees for any unused portion of this credit facility. At June 30, 2006, therewas $6,500,000 outstanding against the revolving credit loan facility, and there were no open letters of credit.

The term loan facilityprovides a maximum commitment of $34,000,000 to finance acquisitions subject to the approval of the lending banks.There are no commitment fees for any unused portion of this credit facility.The Company borrowed $29,000,000 against this facility to finance the Woodmarkacquisition transaction in June 2004, and there was $15,500,000, includingamounts rolled over from the prior term loan facility, outstanding against theterm loan facility at June 30, 2006.

The foreign exchange line provides for the availability of up to $10,000,000in foreign currency forward contracts. These contracts fix the exchange rate onfuture purchases of Japanese yen needed for payments to foreign suppliers. Thetotal amount of foreign currency forward contracts outstanding under the foreign exchange line at June 30,2006, based on that day’s closing spot rate, was approximately $1,151,000.

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Under its credit agreement,the Company is required to adhere to certain financial covenants. At June 30, 2006, and for the quarter then ended,the Company was in compliance with all of these covenants. Certain ofthe Company’s mortgage agreements also require the Company to adhere to certainfinancial covenants. At June 30, 2006, andfor the quarter then ended, the Company was in compliance with all of these covenants.

Capital spending was approximately $908,000 and$268,000 for the six months ended June 30, 2006 and 2005, respectively, whichamounts were provided from working capital. Capital expenditures for theremainder of 2006 are expected to be approximately $600,000, some of which maybe financed through the Company’s credit facilities. Included in the expectedtotal for 2006 are capital expenditures relating to renovation and expansion ofoperating facilities, new products, expansion of existing product lines andreplacement of equipment.

**OFF-BALANCE SHEET ARRANGEMENTS**

The Company’s foreign exchange line provides for theavailability of up to $10,000,000 in foreign currency forward contracts. Thesecontracts fix the exchange rate on future purchases of foreign currenciesneeded for payments to foreign suppliers. The Company has not purchased forwardcontracts on New Taiwan dollars. The total amount of foreign currency forwardcontracts outstanding at June 30, 2006, based on that day’s closing spot rate,was approximately $1,151,000.

The Company, through Florida Pneumatic, imports a significant amount ofits purchases from Japan, with payment due in Japanese yen. As a result, theCompany is subject to the effects of foreign currency exchange fluctuations. TheCompany uses a variety of techniques to protect itself from any adverse effectsfrom these fluctuations, including increasing its selling prices, obtainingprice reductions from its overseas suppliers, using alternative suppliersources and entering into foreign currency forward contracts. The decrease inthe strength of the Japanese yen versus the U.S. dollar from 2005 to 2006 had apositive effect on the Company’s results of operations and its financialposition. During the six-months ended June 30, 2006, the relative value of theU.S dollar in relation to the Japanese yen was above fiscal 2005 averages.There can be no assurance as to the future trend of this value. (See “Item 3 -Quantitative and Qualitative Disclosures About Market Risk.”)

**NEW ACCOUNTING PRONOUNCEMENTS**

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

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**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 June 30, 2006, the Company hadforeign currency forward contracts, maturing in 2006, to purchase Japanese yenat contracted forward rates. The value of these contracts at June 30, 2006,based on that day’s closing spot rate, was approximately $1,151,000, which wasthe approximate value of the Company’s yen-denominated accounts payable. Duringthe three-month periods ended June 30, 2006 and 2005, the Company recorded inits cost of sales a net realized loss of approximately $3,000 and a netrealized gain of $12,000, respectively, on foreign currency transactions.During the six-month periods ended June 30, 2006 and 2005, the Company recordedin its cost of sales a net realized gain of approximately $7,000 and a netrealized loss of $90,000, respectively, on foreign currency transactions. AtJune 30, 2006 and 2005, the Company had no unrealized gains or losses inforeign 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 June 30, 2006 was approximately $130,000.

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

Thecarrying amounts reported in the consolidated balance sheets for cash and cashequivalents, accounts receivable, accounts payable and short-term debt,approximate fair value as of June 30, 2006 because of the relatively short-termmaturity of these financial instruments. The carrying amounts reported for long-termdebt approximate fair value as of June 30, 2006 because, in general, theinterest rates

37

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underlyingthe instruments fluctuate with market rates.

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

**Evaluation of disclosure controls and procedures**

An evaluation was performed, under the supervisionof, and with the participation of, the Company’s management, including thePrincipal Executive Officer and Principal Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securitiesand Exchange Act of 1934). Based on that evaluation, the Company’s management,including the Principal Executive Officer and Principal Financial Officer,concluded that the Company’s disclosure controls and procedures were noteffective for the reasons discussed below related to the weaknesses in ourinternal control over financial reporting. To address the control weaknessesdescribed below, the Company performed additional analysis and performed otherprocedures to ensure the consolidated financial statements were prepared inaccordance with generally accepted accounting principles. Accordingly,management believes that the consolidated condensed financial statementsincluded in this Quarterly Report on Form 10-Q, fairly present, in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.

P&F management is responsible for establishing and maintainingeffective internal controls. Because of its inherent limitations, internalcontrols may not prevent or detect misstatements. A control system, no matterhow well designed and operated, can only provide reasonable, not absolute,assurance that the control system’s objectives will be met. Also, projectionsof any evaluation of effectiveness as to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with policies and procedures 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.

***Description of Material Weaknesses***

Management’s assessment confirmed the followingmaterial weaknesses at June 30, 2006 that were previously identified at March31, 2006 and December 31, 2005 in the Company’s internal control over financialreporting:

1.  Deficiencies in the segregation of duties, specifically as they relateto cash management, the preparation and posting of journal entries and thegeneral controls over information technology security and user access.

2.  Significant internal control deficiencies that were considered to be,in the aggregate, a material weakness, included inadequate staffing andsupervision leading to the untimely identification and resolution of certainaccounting matters; and failure to perform timely reviews, substantiation andevaluation of certain general ledger account balances.

TheCertifications of the Company’s Principal Executive Officer and PrincipalFinancial Officer included as Exhibits 31.1 and 31.2 to this Quarterly Reporton Form 10-Q include, in paragraph 4 of such certifications, informationconcerning the Company’s disclosure controls and procedures and internalcontrol over financial reporting. Such certifications should be read inconjunction with the information contained in this Item 4 - Controls andProcedures for a more complete understanding of the matters

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covered by such certifications.

***Planned Remediation Efforts to Address MaterialWeaknesses***

The Company has developed remediation plans andinitiated action steps during the six-month period ended June 30, 2006 designedto address each of the material weaknesses in the internal control overfinancial reporting identified above and to implement any and all correctiveactions that are required to improve the design and operating effectiveness ofinternal control over financial reporting, including the enhancement of theCompany’s policies, systems and procedures. The Company implemented thefollowing measures to remediate the numbered control deficiencies identifiedabove:

1.  Management has implemented measures tosegregate certain functions and otherwise improve cash management functionsincluding (i) individuals that initiate a wire transfer are now prevented fromtransmitting the wire transfer; (ii) all wire transfers in excess of $100,000now require written approval and release from Corporate management; (iii)modification of its check-signing privileges such that all checks will requiredual manual signatures; and (iv) all blank check stock will now be maintainedin a locked cabinet that will be accessible to an individual who is not a checksigner. In addition, management has implemented measures to segregate thepreparation of journal entries and the subsequent posting to the GeneralLedger.

2.  Management has initiated a review of itstraining and supervision policies and procedures, particularly with respect tothe functions described above where significant deficiencies were noted, whichis expected to include an evaluation of the specific knowledge and skillsrequired to perform each function, an assessment of the personnel trainingnecessary to perform such function adequately, a plan to ensure that allpersonnel receive the appropriate level of training, and a review andmodification of the supervisory procedures over such personnel.

The Company believes that the above measures haveaddressed all matters identified as a material weakness by management and theindependent registered public accounting firm. The Company will continue tomonitor the effectiveness of its internal controls and procedures on an ongoingbasis and will take further actions, as appropriate.

**Changes in Internal Control Over Financial Reporting**

Except as otherwise discussed herein, there havebeen no significant changes in the Company’s internal control over financialreporting during the most recently completed fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting. However, the Company made changes to thedesign and operation of internal control over financial reporting during thesecond quarter in order to increase the design and operating effectiveness ofinternal controls in connection with implementing Section 404 of theSarbanes-Oxley Act of 2002. In addition, the Company is currently implementingenhancements to the Company’s internal control over financial reporting toaddress the material weaknesses described above.

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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, 2005 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**                                                                                                                                                                                         |
|         |       | On May 31, 2006, the Registrant held its Annual  Meeting of Stockholders, at which two proposals, the Election of Directors  and the approval of the Executive 162(m) Bonus Plan, were voted upon.                                               |
|         |       |                                                                                                                                                                                                                                             |
|         |       | The following persons were duly elected to serve,  subject to the Company’s Bylaws, as directors of the Registrant until the  2009 Annual Meeting of Stockholders, or until the election and qualification  of their successor(s):          |

 
| Name of Director    | ** ** | **Votes in favor** | ** ** | **Votes against** | ** ** | **Votes abstained** | ** ** |
|---------------------|------------|--------------------|------------|-------------------|------------|---------------------|------------|
| Jeffrey D. Franklin |       | 3,378,699          |       | 17,194            |       | 0                   |       |
| Sidney Horowitz     |       | 3,377,603          |       | 18,290            |       | 0                   |       |
| Dennis Kalick       |       | 3,379,263          |       | 16,630            |       | 0                   |       |

 
|        |   | The  terms of office of Richard A. Horowitz, Alan I. Goldberg, Robert M.  Steinberg, Robert L. Dubofsky, Mitchell A. Solomon, Kenneth M. Scheriff and  Marc A. Utay as directors of the Registrant continued after the Annual  Meeting of Stockholders. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                    |
|   |   | The  Executive 162(m) Bonus Plan was approved by stockholders as follows:                                                                                                                                                                               |

 
| Votes in favor | ** ** | **Votes against** | ** ** | **Votes abstained** | ** ** |
|----------------|------------|-------------------|------------|---------------------|------------|
| 3,353,631      |       | 34,743            |       | 7,519               |       |

 
|             | ** ** | There  were no broker non-votes pertaining to these proposals.           |
|-------------|------------|--------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                               |
| **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: August 11, 2006 |   | (Principal Financial and Chief Accounting Officer) |

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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, dated as of September 16,  1998, by and between Green Manufacturing, Inc., an Ohio corporation, and the  Registrant (Incorporated by reference to Exhibit 2.1 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).  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**         |       | Stock Purchase Agreement, dated as of May 3, 2002,  by and between Mark C. Weldon and the Registrant (Incorporated by reference  to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated May 3,  2002). 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  Stock Purchase Agreement to the Securities and Exchange Commission upon  request.                                                                                                                                                                                                                                                                                                   |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.3**         |       | Settlement Agreement and  Amendment to Stock Purchase Agreement, dated as of July 22, 2005, by and  between Mark C. Weldon and the Registrant (Incorporated by reference to  Exhibit 2.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.4**         |       | Contract for Purchase and Sale,  dated as of May 1, 2002, between W. I. Commercial Properties, Inc., a Florida  corporation, and Countrywide Hardware, Inc., a Delaware corporation  (Incorporated by reference to Exhibit 4.7 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.5**         |       | Asset Purchase Agreement, dated as of June 30, 2004,  by and among WM Texas International, L.P., a Texas limited partnership  formerly known as Woodmark International, L.P., SH Georgia, Inc., a Georgia  corporation formerly known as Stair House, Inc., Samuel G. Sherstad, WM Texas  GP, LLC, WM Texas Partners, LLC and Woodmark International, L.P., a Delaware  limited partnership (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated  July 14, 2004, and amended September 10, 2004). 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. |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.6**         |       | Asset Purchase Agreement, dated December 13, 2004,  among Rosenboom Machine & Tool, Inc., Green Manufacturing, Inc. and  P&F Industries, Inc. (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated  December 17, 2004, and amended March 4, 2005). 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.                                                                                                                                                                                                                                        |
| ** **      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| **2.7**         |       | Amendment to Asset Purchase Agreement, dated June 8,  2005, among Rosenboom Machine & Tool, Inc., Green Manufacturing, Inc. and  P&F Industries, Inc. (Incorporated by  reference to Exhibit 2.7 to the Registrant’s Quarterly Report on Form 10-Q  for the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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|            |   | quarter ended June 30, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.8**    |   | Asset Purchase Agreement, dated  as of February 2, 2005, between Green Manufacturing, Inc. and Benko Products,  Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current  Report on Form 8-K dated February 4, 2005). 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.                   |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **2.9**    |   | Asset Purchase Agreement, dated as of October 11,  2005, between Embassy Industries, Inc. and Mestek, Inc. (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated  October 12, 2005). 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.                            |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **3.1**    |   | Restated Certificate of Incorporation of the  Registrant (Incorporated by reference to Exhibit 3.1 to Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                             |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **3.2**    |   | Amended By-laws of the Registrant (Incorporated by  reference to Exhibit 3.2 to Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                                                   |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **3.3**    |   | Amendment to the Amended By-laws of the Registrant  (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report  on Form 8-K dated March 21, 2005).                                                                                                                                                                                                                                                                                                     |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **3.4**    |   | Amendment to the Amended By-laws of the Registrant  (Incorporated by reference to Exhibit 3 to the Registrant’s Current Report on  Form 8-K dated September 16, 2005).                                                                                                                                                                                                                                                                                                   |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **4.1**    |   | Rights Agreement, dated as of August 19, 2004,  between the Registrant and American Stock Transfer & Trust Company, as  Rights Agent (Incorporated by reference to Exhibit 1 to the Registrant’s  Registration Statement on Form 8-A dated August 19, 2004).                                                                                                                                                                                                         |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **4.2**    |   | Credit Agreement, dated as of June 30, 2004, by and  among the Registrant, Florida Pneumatic Manufacturing Corporation, Embassy  Industries, Inc., Green Manufacturing, Inc., Countrywide Hardware, Inc.,  Nationwide Industries, Inc., Woodmark International, L.P. and Citibank, N.A.,  as Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated July 14, 2004).        |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **4.3**    |   | Amendment to Credit Agreement, dated June 24, 2005,  by and among the Registrant, Florida Pneumatic Manufacturing Corporation,  Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide Hardware,  Inc., Nationwide Industries, Inc., Woodmark International, L.P. and Citibank,  N.A., as Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated June 27, 2005). |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **4.4**    |   | Amendment No. 2 to Credit Agreement, dated December  27, 2005, by and among the Registrant, Florida Pneumatic Manufacturing Corporation,  Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide Hardware,  Inc., Nationwide Industries, Inc.,                                                                                                                                                                                                                      |

 

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|            |   | Woodmark International, L.P. and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by  reference to Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2005).                                                                                                                                                                                                                                                                                                              |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.5**    |   | Amendment No. 3 to Credit Agreement, dated February  13, 2006, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.5 to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2005). |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.6**    |   | Amendment No. 4 to Credit Agreement, dated May 11,  2006, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit 4.6 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).          |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.7**    |   | Amendment No. 5 to Credit Agreement, dated June 29,  2006, by and among the Registrant, Florida Pneumatic Manufacturing  Corporation, Embassy Industries, Inc., Green Manufacturing, Inc., Countrywide  Hardware, Inc., Nationwide Industries, Inc., Woodmark International, L.P.,  Pacific Stair Products, Inc., WILP Holdings, Inc., and Citibank, N.A., as  Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibit  10.1 to the Registrant’s Current Report on Form 8-K dated June 30, 2006).                            |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **4.8**    |   | Certain instruments defining the rights of holders  of the long-term debt securities of the Registrant are omitted pursuant to  Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant agrees  to furnish supplementally copies of these instruments to the Commission upon  request.                                                                                                                                                                                                                                                                 |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.1**   |   | Second Amended and Restated Employment Agreement,  dated as of May 30, 2001, between the Registrant and Richard A. Horowitz  (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2001).                                                                                                                                                                                                                                                                                               |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.2**   |   | Amendment to Second Amended and Restated Employment  Agreement, dated as of October 24, 2005, between the Registrant and Richard  A. Horowitz (Incorporated by reference to Exhibit  10.1 to the Registrant’s Current Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                              |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.3**   |   | Agreement, dated as of October 24, 2005, among the  Registrant, Richard A. Horowitz and the 1994 Richard A. Horowitz Family Trust  (Incorporated by reference to Exhibit  10.2 to the Registrant’s Current Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                                                                                                                         |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **10.4**   |   | Consulting Agreement, effective as of November 1,  2003, between the Registrant and Sidney Horowitz (Incorporated by reference  to Exhibit 10.2 to the Registrant’s Annual                                                                                                                                                                                                                                                                                                                                                                                     |

 

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|                                                                                                                                                                                                                                                                                                                            |   | Report on Form 10-K for the fiscal year ended  December 31, 2003).                                                                                                                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **10.5**                                                                                                                                                                                                                                                                                                                   |   | 1992 Incentive Stock Option Plan of the Registrant,  as amended and restated as of March 13, 1997 (Incorporated by reference to  Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal  year ended December 31, 2003).                           |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **10.6**                                                                                                                                                                                                                                                                                                                   |   | 2002 Stock Incentive Plan of the Registrant  (Incorporated by reference to Exhibit 4.7 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended March 31, 2002).                                                                                      |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **10.7**                                                                                                                                                                                                                                                                                                                   |   | Contract of Sale, dated January 13, 2006, between  the Registrant and J. D’Addario & Company, Inc. (Incorporated by  reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated January 13, 2006).                                      |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **10.8**                                                                                                                                                                                                                                                                                                                   |   | First Amendment to Contract of Sale, dated March 8,  2006, between the Registrant and J. D’Addario & Company, Inc.  (Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2005). |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **10.9**                                                                                                                                                                                                                                                                                                                   |   | Executive 162(m) Bonus Plan of the Registrant (Incorporated  by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K dated May 31, 2006).                                                                                                        |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **14.1**                                                                                                                                                                                                                                                                                                                   |   | Code of Business Conduct and Ethics of the  Registrant and its Affiliates (Incorporated by reference to Exhibit 14.1 to  the Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2003).                                                   |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **31.1**                                                                                                                                                                                                                                                                                                                   |   | Certification of Richard A. Horowitz, Principal  Executive Officer of the Registrant, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Filed herein).                                                                                                           |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **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 (Filed herein).                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **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 (Filed  herein).                                                           |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| **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 (Filed  herein).                                                         |
| ** **                                                                                                                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                       |
| A copy of any of the foregoing exhibits to this  Quarterly Report on Form 10-Q may be obtained, upon payment of the  Registrant’s reasonable expenses in furnishing such exhibit, by writing to  P&F Industries, Inc., 445 Broadhollow Road, Suite 100, Melville New York  11747, Attention: Corporate Secretary. |

 

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