P&F Industries

This past year proved to be a challenging one for P & F Industries. Although we faced a difficult economic environment, particularly during the latter part of the year, we believe that the strategies employed to serve our markets will position us favorably for growth and profit enhancement in the years ahead.

Our revenues decreased 2.2%, from $82,700,440 in 1999 to $80,898,674 in 2000. This decrease in revenues, together with an increase in the cost of a substantial amount of imported product due to currency fluctuations, caused income from operations to decrease 13.7%, from $4,545,505 to $3,824,940. Diluted earnings per share decreased from $123 to $1.04.

We are pleased to report that Florida Pneumatic completed a successful first full year of business with the new home center customer obtained in late 1999. We are now the leading supplier to two of the most significant retail outlets for pneumatic tools in the United States. With regard to factory operations at Florida Pneumatic, we have embarked on a cellular manufacturing initiative for our approximately 50 domestically manufactured tools. This initiative involves consolidating all manufacturing operations with respect to a particular product line and training one group of employees to work as a team to produce that product in small quantities. Thus far, this effort has proved effective at reducing costs and improving productivity. As of year-end, we had converted assembly of 20 tools to the cellular program, with the remainder of the tools expected to be converted by mid-year 2001. For this reason, we are considering manufacturing at Florida Pneumatic additional tools that are now imported.

Productivity gains and stabilization in employee turnover were two major highlights at Green Manufacturing, as both areas improved substantially as a result of restructuring wages and other measures implemented in the second half of 2000. Employee turnover decreased from 50% to less than 10% by year-end. While the wage increase reduced profits in the short-run, the dollar savings from the productivity gains are now exceeding the cost of the plan. In addition, Green Manufacturing began a plant reconfiguration to improve material flow, and implemented a formalized cost reduction program. We expect these initiatives to have a positive impact on results in 2001 and to benefit us in the future as economic conditions improve.

Although Embassy Industries' heating business exhibited only modest growth in 2000, our customer relationships continue to be sound. Unfortunately, housing starts, the single most important economic determinant of our business, began to weaken late last year. Nevertheless, we are excited about the introduction of our new Ambassador boiler line, which is expected to be an important contributor to both revenues and profits in the future. This "wall hung" boiler is ideally suited for multi-unit dwellings, where space is at a premium, and complements our radiant heating system, due to its high efficiency and ability to run at low water temperatures.

Sales were flat for the year at Embassy's Franklin hardware division. Franklin lost two significant accounts at the end of 2000, but continued to do well with its two largest customers. Sales to each of these top two accounts increased approximately 20% during the year.

The stock repurchase program begun in 2000 continues. The Board of Directors has authorized the repurchase of a total of 180,000 shares, subject to management's discretion. To date, we have purchased approximately 54,000 shares of stock, at an average price of $ 6.97 per share. There is no assurance, however, that any additional shares will be repurchased, since the decision to repurchase shares is based on competing uses of available cash.

The weakening of the overall economy had an impact on P&F's results for 2000 and, along with most businesses in the U.S., we expect 2001 to be an equally challenging year. We will face these challenges by continuing to pursue a business strategy that focuses on introducing new products, increasing operating efficiencies and utilizing our significant borrowing base and cash flow to make accretive acquisitions in areas that complement our existing product lines.

Finally, I would like to express my appreciation to our many customers for their continued partnership, and, as always, I must thank our talented, dedicated and enthusiastic employees. Our achievements on behalf of our shareholders and customers are due to their efforts.

Very truly Yours,

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