P&F Industries

I am pleased to report that 1998 was a tremendous year for P & F Industries. A continued commitment to our customers, a strong operational focus and the outstanding efforts of our employees combined to deliver another year of record revenues and profits.

For the seventh consecutive year, P&F achieved an increase in net income from continuing operations, as earnings rose 57%, from $2,513,779 in 1997 to $3,943,441 in 1998. Diluted earnings per share from continuing operations increased from $.71 to $1.07. Consolidated revenues increased 16%, from $50,026,947 in 1997 to $58,165,715 in 1998.

Each of our existing business segments prospered in 1998 and we were able to achieve several major objectives. First, we completed a significant, accretive acquisition that provides us with entry into the fluid power industry, a large and growing market. Second, we added several new key customers to both our heating and hardware units, reflecting our determined efforts to be customer driven. Finally, we expanded our presence in the pneumatic tool market with additional product offerings and a substantial expansion of our business with several large customers.

On September 16, 1998, P&F realized a strategic goal that had been the focus of much effort. On that date, we acquired Green Manufacturing, Inc., a manufacturer of hydraulic cylinders located in Bowling Green, Ohio. Green's products are marketed on an OEM basis to manufacturers of towing vehicles, waste/compacting equipment, lifts and construction machinery. We believe Green complements our existing businesses while providing us with a strategic position in the multi-billion dollar fluid power industry. In 1998, Green contributed almost $6.6 million to consolidated revenues and was immediately accretive to our earnings. We are very excited about the future of this new subsidiary and its ability to enhance our Company in the years to come.

Florida Pneumatic again achieved record results in 1998. Without the effect of a $5.5 million one-time order shipped in the second half of 1997, the growth in pneumatic tool sales would have been more than 18% for 1998. Growth was especially strong at our largest catalog account, where we were successful in significantly increasing the number of pages dedicated to Florida Pneumatic's products. Finally, in 1998, we launched a new, professional quality line of pneumatic tools. Sales of these products represented a significant portion of the growth with our largest customer.

At Embassy Industries, heating equipment sales increased 13%. We continue to be encouraged by the growth in our radiant heating line, which continues to benefit from positive industry trends. However, the most important development in 1998 was Embassy's success in obtaining several large new accounts in the baseboard market. This is important not only because it affirms our more "pull-based" approach to building contractor awareness, but also because it gives us additional marketing opportunities for our radiant products with these same customers.

Some of the most exciting news in 1998 came from the Franklin Manufacturing division of Embassy. Sales increased 4% in 1998, with margins also improving. However, we were especially pleased to announce that, beginning in the third quarter of 1998, we obtained Home Depot as a major new account. Initially, sales will be only to the Northeast region, but we will be making every effort to increase our penetration to other regions which are serviced by this important customer.

A major thrust for 1999 will be to focus our efforts internally on our manufacturing operations. We plan to capitalize on the consistent growth in the radiant heating market by bringing a large portion of the manufacturing of this product in-house. At the same time, we will be making major changes in the production environment at Green as we bring to bear some of our expertise in manufacturing.

As we go forward through 1999, we will continue to deliver new and related products into our current distribution channels, where we believe we can leverage our excellent customer relationships. We find this opportunity to be particularly great in the pneumatic tool, heating and hardware segments, where the end user

"Each of our existing business segments prospered in 1998 and we were able to achieve several major objectives".
- Richard A. Horowitz

welcomes innovation and new competitive product offerings. We hope to create these new product offerings both through internal development and through the acquisition of either a stand-alone product line or a complementary business with distribution channels overlapping those of our existing businesses. Finally, I once again wish to thank our 400 employees for their hard work and dedication, our numerous customers for their continued partnership and our shareholders for their ongoing support. We eagerly anticipate the coming year and hope to improve on what we believe is already an interesting and compelling story at P&F Industries.

Very truly Yours,

Richard A. Horowitz
Chairman of the Board, President
and Chief Executive Officer