P&F Industries

P&F's performance during 2008 was reflective of our nation's overall sluggish economy, as we continue to be severely affected by the decline in the number of new housing starts across the nation, particularly in the southern portion of the United States. Further, the loss of a large retail customer during the past year, coupled with dwindling economic consumer sentiment, were factors that also contributed to the decline in overall revenue and profits. As such, our consolidated revenue was $87.7 million for 2008, compared to $110.8 million in 2007. However, despite these challenging times and pricing pressures from the marketplace, we were able to improve our consolidated gross margins by 1.1 percentage points to 30.7%, from 29.6% in the prior year.

With declining revenue and gross profits, managing operating expenses became a major objective throughout the organization in 2008. During the past year we were able to reduce our selling, general and administrative expenses by more than $3.8 million, or 13.5%, when compared to 2007. However, as much of our expenses are fixed, these expenses, as a percent of revenue, increased approximately 2.3% over the prior year. Further, as the result of decreased revenue, and, we believe, a very slow recovery for the southwestern portion of the nation, in mid-2008, we closed our Pacific Stair Products' milling facility, which was located in Vista, California, and combined its warehousing operations into one facility in Vista, California. We have made it a prime directive to re-visit operating expenses in 2009, to identify further opportunities for cost reductions, without sacrificing quality or superior customer service.

During the fourth quarter, in accordance with generally accepted accounting principles, we recognized impairment charges of $7.6 million on the carrying value of goodwill and other intangible assets within our Hardware group. This was primarily due to the housing start slowdown, which began in earnest last year. I would like to point out that, as depicted in the accompanying charts located in the inside cover of our 2008 Annual Report, had we not incurred the non-cash impairments charge in 2008, our after-tax earnings from continuing operations would have been approximately $446,000, and our diluted earnings per common share from continuing operations would have been $0.12. However, due to these write downs, our overall loss per common share in 2008 on both a both basic and diluted basis was $1.18, compared to a loss of $3.90 for 2007.

However, despite all this dismal news, I am pleased to report that, in March 2009, we amended our credit facility with our lenders. Among other things, the amendment consolidated our term loans, which at the time aggregated $13.2 million, to one term loan in the amount of $7.1 million, with the balance of $6.1 million added to the revolving credit portion of the banking facility. In addition, the revolving credit portion of this facility was amended to increase the maximum borrowings to $22 million from $18 million. This amendment is projected to reduce our debt servicing cash outlays under the credit facility during the twelve month period commencing April 1, 2009, to $1.8 million. Had we not amended the terms of the credit facility, our debt servicing cash outlays would have been approximately $5.2 million for the same period. Furthermore, the term of the revolving credit portion of the credit agreement was extended until March 30, 2010.

We believe 2009 will be another difficult year, as the current forecast for the economy and of the number of new housing starts remains bleak. However, we remain committed to our strategic initiatives and continue to work diligently to position ourselves to be more profitable when economic and market conditions recover. We intend to continue to expand our marketing efforts and secure new customers wherever possible.

Finally, I would like to express my gratitude to our customers for their continued loyalty and support. Further, I wish to thank our talented and dedicated employees. Our achievements on behalf of our shareholders are due to their efforts.

Very truly Yours,

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