Use these links to rapidly review the documentTABLE OF CONTENTS ITEM 8. Financial Statements



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                                  |                                                                                         
|------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the Fiscal Year Ended December 31, 2007
|or                                         
|o                                           | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-5332

P&F INDUSTRIES, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)                      |  | 22-1657413(I.R.S. Employer Identification Number)
|------------------------------------------------------------------------------------------- |  | -------------------------------------------------
|445 Broadhollow Road, Suite 100, Melville, New York(Address of principal executive offices) |  | 11747(Zip Code)                                  
|Registrant's telephone number, including area code:(631) 694-9800                          

Securities registered pursuant to Section 12(b) of the Act:

(Title of each class)

(Name of each exchange on which registered)Class A Common Stock, $1.00 par value

The NASDAQ Stock Market LLC


Securities
registered pursuant to Section 12(g) of the Act:NONE

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of the registrant's Class A Common Stock held by non-affiliates of the registrant, based on the last sale price on
June 30, 2007 (the last business day of the registrant's most recently completed second fiscal quarter), was approximately $25,340,000.

As
of March 27, 2008, there were 3,637,462 shares of the registrant's Class A Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III
of this Annual Report on Form 10-K incorporates by reference information from the registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held May 29, 2008.



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P&F INDUSTRIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

TABLE OF CONTENTS



|           |  |                                                                                                              |  | Page
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|PART I     |  |                                                                                                              |  |     
|Item 1.    |  | Business                                                                                                     |  | 2   
|Item 1A.   |  | Risk Factors                                                                                                 |  | 5   
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 8   
|Item 2.    |  | Properties                                                                                                   |  | 8   
|Item 3.    |  | Legal Proceedings                                                                                            |  | 8   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 8   
|PART II    |  |                                                                                                              |  |     
|Item 5.    |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 9   
|Item 6.    |  | Selected Financial Data                                                                                      |  | 9   
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 9   
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 22  
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 23  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 62  
|Item 9A(T) |  | Controls and Procedures                                                                                      |  | 62  
|Item 9B.   |  | Other Information                                                                                            |  | 63  
|PART III   |  |                                                                                                              |  |     
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 64  
|Item 11.   |  | Executive Compensation                                                                                       |  | 64  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 64  
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 64  
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  | 64  
|PART IV    |  |                                                                                                              |  |     
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 65  
|           |  | Signatures                                                                                                   |  | 70  

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FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking statements made by or on behalf of P&F
Industries, Inc. and subsidiaries (the "Company"). The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained
in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. Generally, the inclusion of the words "believe," "expect," "intend," "estimate," "anticipate,"
"will," their opposites and similar expressions identify statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and that are intended 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 the Company's historical performance and on current plans, estimates and expectations. Such forward-looking statements are
subject to various risks and uncertainties, including those identified in Item 1A of this Annual Report on Form 10-K, which may cause actual results to differ materially from
the forward looking statements. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking
statement, whether as a result of new information, future developments or otherwise.

1

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PART I

ITEM 1.    Business

P&F Industries, Inc. ("P&F") is a Delaware corporation incorporated on April 19, 1963. P&F and each of its subsidiaries are herein referred to
collectively as the "Company." In addition, the words "we", "our" and "us" refer to the Company. The Company operates in two primary lines of business, or segments: (i) tools and other products
("Tools") and (ii) hardware and accessories ("Hardware").

Tools

We conduct our Tools business through a wholly owned subsidiary, Continental Tool Group, Inc. ("Continental"), which in turn currently operates through its
wholly owned subsidiaries, Florida Pneumatic Manufacturing Corporation ("Florida Pneumatic") and Hy-Tech Machine, Inc. ("Hy-Tech").

Florida Pneumatic

Florida Pneumatic imports, manufactures and sells pneumatic hand tools, primarily for the industrial, retail and automotive markets, and imports and sells
compressor air filters. This line of products includes sanders, grinders, drills, saws and impact wrenches. These tools are similar in appearance and function to electric hand tools, but are powered
by compressed air, rather than directly by electricity. Air tools, as they are also called, are generally less expensive to operate, offer better performance and
weigh less than their electrical counterparts. Florida Pneumatic imports or manufactures approximately seventy-five types of pneumatic hand tools, most of which are sold at prices ranging
from $50 to $1,000, under the names "Florida Pneumatic" and "Universal Tool," as well as under the trade names or trademarks of several private label customers. These Florida Pneumatic products are
sold to distributors, retailers and private label customers through in-house sales personnel and manufacturers' representatives. Users of Florida Pneumatic's hand tools include industrial
maintenance and production staffs, do-it-yourself mechanics, automobile mechanics and auto body personnel.

Florida
Pneumatic purchases nearly 90% of its pneumatic tools from a Far East trading company that owns or represents 21 individual factories in Japan, Taiwan and China. Of the total
pneumatic tool purchases in 2007, approximately 7% are bought from Japan, 26% from Taiwan and 66% from China. Florida Pneumatic manufactures certain of its pneumatic tools at its factory in Jupiter,
Florida and also imports its air filters. There are redundant sources for every product purchased and manufactured.

Florida
Pneumatic also markets, through its Berkley Tool division ("Berkley"), a product line which includes pipe and bolt dies, pipe taps, wrenches, vises and stands, pipe and tubing
cutting equipment, hydrostatic test pumps, and replacement electrical components for a widely-used brand of pipe cutting and threading machines. Florida Pneumatic markets Berkley's
products through industrial distributors and contractors. We source our Berkley product line from China, Israel as well as domestic sources.

In
addition, through its Franklin Manufacturing ("Franklin") division, Florida Pneumatic imports a line of door and window hardware. Franklin imports and packages approximately 275 types
of hardware products, including locksets, deadbolts, door and window security hardware, rope-related hardware products and fire escape ladders. Franklin's products generally range in price
from under $1.00 to $30.00, and are sold to retailers, wholesalers and private label accounts through manufacturers' representatives and in-house sales support personnel. Nearly all of
Franklin's sales are of products imported from China.

The
primary competitive factors in the pneumatic hand tool market are price, service and brand-name awareness. The primary competitive factors in Berkley's business are price
and service. The primary competitive factors in Franklin's business are price, service, skill in packaging and point-of-sale

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marketing.
Florida Pneumatic's products are sold off the shelf, and no material backlog of orders exists. The business is not seasonal, but it may be subject to significant periodic changes resulting
from holiday sales promotions by customers.

Hy-Tech

In February 2007, Continental, through a newly formed subsidiary, Hy-Tech, acquired substantially all of the operating assets of two companies that
were not affiliated with the Company, Hy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear & Machine, Inc. and certain real property from another
unaffiliated third party, HTM Associates.

Hy-Tech
manufactures and distributes pneumatic tools and parts for industrial applications. Hy-Tech manufactures approximately sixty types of industrial pneumatic
tools, most of which are sold at prices ranging from $300 to $7,000, under the names "ATP", "Thaxton", "THOR" and "Eureka", as well as under the trade names or trademarks of other private label
customers. This line of products includes grinders, drills, saws, impact wrenches and pavement breakers.

Hy-Tech's
products are sold to distributors and private label customers through in-house sales personnel and manufacturers' representatives. Users of
Hy-Tech's tools include refineries, chemical plants, power generation facilities, the heavy construction industry, oil and mining companies and heavy industry. Hy-Tech's
products are sold off the shelf, and are also produced to customer's orders. The business is not seasonal, but it may be subject to significant periodic changes resulting from scheduled shutdowns in
refineries, power generation facilities and chemical plants.

The
primary competitive factors in the industrial pneumatic tool market are quality, breadth of products and availability of products, customer service and technical support.

Hardware

We conduct our Hardware business through a wholly owned subsidiary, Countrywide Hardware Inc. ("Countrywide"), which in turn operates through its wholly
owned subsidiaries, Nationwide Industries, Inc. ("Nationwide"), Woodmark International, L.P. ("Woodmark") and Pacific Stair Products, Inc. ("Pacific Stair").

Nationwide

Nationwide is an importer and manufacturer of door, window and fencing hardware, including rollers, hinges, window operators, sash locks, custom zinc castings and
door closers. Nationwide's products are sold through in-house sales personnel and manufacturers' representatives to distributors, retailers and OEM customers. End users of Nationwide's
products include contractors, home builders, pool and patio distributors, OEM/private label customers and general consumers.

Most
of Nationwide's sales are of products imported from Taiwan and China. Nationwide currently out-sources the manufacturing of approximately 94% of its product with several
overseas factories, while retaining design, QC, patent and trademark control. There are redundant sources for most products whether through dual manufacturing arrangements or back up buy/sell
arrangements. Nationwide manufactures approximately 6% of its products sold including rollers, hinges and pool enclosure products at its facility in Tampa, Florida. Additionally, Nationwide
distributes its products to its customers located in the western U.S. through the warehouse leased by our Pacific Stair subsidiary, located in Vista, California.

Nationwide's
sales are somewhat seasonal, with revenues typically increasing during the spring and summer months. The majority of Nationwide's products are sold off the shelf.

3

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The
primary competitive factors in Nationwide's business are price, quality, product availability and service.

Woodmark

Woodmark is an importer and distributor of residential hardware and other accessories for new construction and home improvement applications, including wood and
iron stair parts as well as kitchen and bath hardware such as residential plumbing fixtures.

Woodmark's
stair products are sold through in-house sales personnel and manufacturers' representatives to: a) traditional one- and two-step
distributors of construction components who in turn sell to carpenters, home builders and the retail channel;
b) distributors who specialize in stair parts and staircase installation; and c) stair parts manufacturers who outsource certain components from other manufacturers. Woodmark's
residential plumbing fixtures are sold through in-house sales personnel and manufacturers' representatives to plumbing wholesalers and distributors, purchasing cooperatives and
OEMs in manufactured housing, and recreational vehicle industries as well as to distributors specializing in maintenance and repair supplies.

Woodmark
purchases most of its stair parts and kitchen and bath products through a longstanding relationship with a Far East trade partner that owns or represents four individual
factories in China and Taiwan. Of the total stair parts and kitchen and bath product purchases, approximately 70% are bought from China and 10% from Taiwan. There are redundant sources for most
products purchased and manufactured.

The
primary competitive factors in Woodmark's business are price, quality and product availability.

Pacific Stair

In January 2006 we, through a newly formed subsidiary, Pacific Stair Products, Inc., ("Pacific Stair"), purchased substantially all the operating assets of
Pacific Stair Products, a California corporation. Pacific Stair is a manufacturer of premium stair rail products and a distributor of Woodmark's staircase components to the building industry,
primarily in southern California and the southwestern region of the United States.

Similar
to Woodmark, Pacific Stair's products are sold through in-house sales personnel to: a) traditional one- and two-step distributors of
construction components who in turn sell to carpenters, home builders and the retail channel; b) distributors who specialize in stair parts and staircase installation; and c) stair parts
manufacturers who outsource certain components from other manufacturers.

The
primary competitive factors in Pacific Stair's business are price, quality and product availability.

Significant Customers

The Tools segment has one customer that accounted for approximately 19.1% and 17.8%, of consolidated revenue for the years ended December 31, 2007, and
2006, respectively, as well as 26.3% and 37.8% of consolidated accounts receivable as of December 31, 2007 and 2006, respectively. A second customer accounted for 8.4% and 9.8%, of consolidated
revenues for the years ended December 31, 2007 and 2006, respectively, and 9.1% and 11.5% of consolidated accounts receivable as of December 31, 2007 and 2006, respectively. We have been
informed that we will be phased out as a vendor for this second customer, likely commencing sometime during the second quarter of 2008. We do not believe this will have a significant impact on our
consolidated operating earnings for the full year of 2008. Although this customer generated significant revenue in recent years, they have generated

4

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little
profit due to the many required marketing and servicing costs associated with maintaining this customer. There are no significant customers in the Hardware segment.

Discontinued Operations

Green Manufacturing Inc. ("Green")

Green was primarily engaged in the manufacture, development and sale of heavy-duty welded custom designed hydraulic cylinders sold for use as
integrated components on a variety of equipment and machinery manufactured by others. Green also manufactured a line of access equipment for the petro-chemical and bulk storage industries. This
product line consisted of bridges, platforms, walkways and stairways, constructed of steel or aluminum and generally installed outdoors. In addition, Green marketed a small line of diggers used
primarily as attachments to small tractors for light farm work. This product line was marketed through farm equipment dealers and wholesalers. We sold the principal assets of Green between December
2004 and July 2005 in three transactions pursuant to three separate asset purchase agreements with non-affiliated third parties.

Embassy Industries Inc. ("Embassy")

Embassy was engaged in the manufacture and sale of baseboard heating products, sold nationally for use in hot-water heating systems installed in
single family homes, multi-unit dwellings and commercial and industrial buildings. Embassy's products were sold principally to wholesalers by manufacturers' representatives and
in-house sales personnel. Embassy's products were also sold to other manufacturers for incorporation into their products and for distribution on a private-label basis. Embassy also
imported a line of radiant heating systems. These systems include the tubing, manifolds, controls and installation supplies. Embassy also provided computer software that aids in the design of the
system. In October 2005, Embassy sold substantially all of its operating assets, including, among others, machinery and equipment, inventory, accounts receivable and certain intangibles, to a
non-affiliated third party. In June 2007, Embassy sold the real property to a different non-affiliated third party.

Employees

We employed 274 persons as of December 31, 2007, of which 261 were full-time employees. None of these employees are represented by a union. We
believe that our relationships with our employees are satisfactory.

ITEM 1A.    Risk Factors

A wide range of factors could materially affect our performance. In addition to the factors affecting specific business operations identified in connection with
the description of these operations and the financial results of these operations elsewhere in this report, the following factors, among others, could adversely affect our results of operations or
financial position:



5

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6

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The
risk factors described above are not intended to be all-inclusive. There can be no assurance that we have correctly identified and appropriately assessed all factors
affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that
we currently believe to be immaterial also may adversely impact us. Should any risks and uncertainties develop into actual events, these developments could have a material adverse effect on our
business, results of operations or financial position.

7

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ITEM 1B.    Unresolved Staff Comments

None

ITEM 2.    Properties

Tools

Florida Pneumatic owns a 72,000 square foot plant facility which is located in Jupiter, Florida. The property is subject to a mortgage. Hy-Tech owns a
51,000 square foot facility which is located in Cranberry Township, Pennsylvania and leases a 10,000 square foot facility located in Punxsutawney, Pennsylvania.

Hardware

Countrywide owns the 56,250 square foot plant facility located in Tampa, Florida in which Nationwide conducts its business. Countrywide leases part of its
facility to a non-affiliated tenant. The facility is subject to a mortgage. Woodmark leases three plant facilities from non-affiliated landlords. One facility is 55,000 square
feet and is located in Plano, Texas and is subject to a lease which expires July 2011. The second facility is 17,500 square feet and is located in Austell, Georgia. This facility is subject to a lease
expiring May 2010. A third plant facility is leased from a non-affiliated landlord on a month-to-month basis. Pacific Stair leases two plant facilities; a 25,400
square foot warehouse located in Vista California from a non-affiliated landlord with the lease term expiring in July 2008 and a 12,700 square foot manufacturing facility also located in
Vista, California with a lease term expiring in August 2008.

Each
facility either provides adequate space for the operations of the respective subsidiary for the foreseeable future or can be modified or expanded to provide additional space. Our
executive offices of approximately 5,000 square feet are located in an office building in Melville, New York and are leased from a non-affiliated landlord with a lease term expiring in
March 2013.

Embassy
sold its 75,000 square foot facility which was located in Farmingdale New York in 2007.

ITEM 3.    Legal Proceedings

We are a defendant or co-defendant in various actions brought about in the ordinary course of conducting our business. We do not believe that any of
these actions are material to our financial position.

ITEM 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the last quarter of the period covered by this Annual Report on Form 10-K.

8

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PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our Class A Common Stock trades on the Nasdaq Global Market under the symbol PFIN. The range of the high and low closing sales prices for our
Class A Common Stock during the last two years were as follows:

2007

High

LowFirst Quarter

$
13.94

$
11.50Second Quarter


13.99


10.22Third Quarter


11.68


9.82Fourth Quarter


11.70


5.27


2006

High

LowFirst Quarter

$
14.73

$
11.10Second Quarter


14.91


11.90Third Quarter


12.28


9.01Fourth Quarter


12.46


9.90


As
of March 24, 2008, there were approximately 1,100 holders of record of our Class A Common Stock and the closing sale price of our stock as reported by the The Nasdaq
Global Market was $6.15. We have not declared any cash dividends on its Class A Common Stock since its incorporation in 1963 and have no plans to declare any cash dividends in the foreseeable
future.

Issuer Purchases of Equity Securities

On September 5, 2007, we issued a press release announcing that our Board of Directors had extended the time during which we may purchase shares under our
previously announced share repurchase program to September 30, 2008. We are authorized to repurchase up to 150,000 shares of Class A
Common Stock under such program. We have not re-purchased any of our Class A common shares during 2007.

ITEM 6.    Selected Financial Data



ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Overall, as illustrated in the table below, consolidated 2007 revenue of $110,825,000 decreased $908,000 or 0.8% compared to $111,733,000 reported for 2006.
Similarly, for the year 2007 we incurred a decrease in gross margin of $1,139,000 or 3.4% points from 2006 results.

Our
overall financial condition to a large extent is reflective of the general economy, in particular the new home sector. The prolonged down-turn in the number of new homes
constructed in the U.S., most notably in the southwest region, continues to adversely affect revenue and gross margin reported at Countrywide, our Hardware segment. According to the U.S. Department of
Commerce Census data, new single-unit housing starts were 1,218,000, 1,655,000 and 1,636,000 for 2007, 2006 and 2005, respectively. The fall-off of single unit housing starts
from 2006 to 2007 of 437,000 or 26.4% highlights the sluggishness in the sector.

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Revenue
and gross margin at Continental, our Tools segment increased primarily as the result of our acquisition in February 2007 of Hy-Tech, which reported revenue of
$14,490,000 and gross margin of 37.3%. While this segment has not, to date, been materially adversely affected by the housing downturn and sluggish economy, we did incur gross margin erosion of 3.4%
points on revenue of approximately $44,374,000, which is slightly less than the prior year revenue.

In
accordance with generally accepted accounting principles we are required to evaluate the carrying value of our intangible assets at least once a year. We determined that certain
intangible assets were impaired. As a result we recorded impairment charges of approximately $23,462, 000 during the fourth quarter of 2007. We believe these impairment charges are primarily the
result of the continuing down-turn of the number on new homes being constructed.

During
the second quarter of 2007, Embassy completed the sale of real property it owned, located in Farmingdale, New York. The transaction resulted in a pre-tax gain of
approximately $5,100,000. Approximately $1,200,000 of the sale price was applied to settle a mortgage; the balance was used to pay down debt.

Results
of operations for our businesses acquired are reported in the Consolidated Financial Statements from the date of acquisition. As such, results for Hy-Tech have been
included since February 12, 2007 and Pacific Stair products since January 3, 2006.

Please
refer to the result of operations data provided within this section for further information.

|         |              | Net revenue |            | Change      |  
|-------- | ------------ | ----------- | ---------- | ----------- | -
|
|Hardware |              | $           | 51,511,000 |             | $
|Tools    |              |             | 59,314,000 |             |  
|         |              |             |            |             |  
|         | Consolidated |             | $          | 110,825,000 |  
|         |              |             |            |             |  

KEY INDICATORS

Economic Measures

As noted above the most critical economic indicator affecting our overall performance for the foreseeable future is new housing starts. During 2007 revenue for
our Hardware segment fell proportionate to the decrease in new housing starts.

Another
key economic measure relevant to us is the cost of metals, especially various types of steel and aluminum. Also important is the value of the dollar in relation to the Japanese
yen ("yen") and the Taiwan dollar ("TWD"), as we purchase a significant portion of its products from these two countries. Purchases from Chinese sources are made in U.S. dollars. However, if the
Chinese currency, the Renminbi ("RMB"), were to be revalued against the dollar, there could be a significant negative impact on the cost of our products.

Operating Measures

Key operating measures we use to manage our operating segments are: orders; shipments; development of new products; controlling customer churn; inventory levels
and productivity. These measures are
recorded and monitored at various intervals, including daily, weekly and monthly. To the extent these measures are relevant, they are discussed in the detailed sections for each operating segment.

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Financial Measures

Key financial measures we use to evaluate the results of our business include: revenue; gross margin; selling, general and administrative expenses; earnings
before interest; taxes and bonus; operating cash flows and capital expenditures; return on sales; return on assets; days sales outstanding and inventory turns. These measures are reviewed at monthly,
quarterly and annual intervals and compared to historical periods as well as established objectives. To the extent that these measures are relevant, they are discussed in the detailed sections for
each operating segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Certain of these
accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and
liabilities, revenues and expenses. On an ongoing basis, we evaluate estimates, including those related to bad debts, inventory reserves, goodwill and intangible assets and warranty reserves. We base
our estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting
policies are further described below.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the sale price is fixed or
determinable, and collectibility is reasonably assured. We sell our goods on terms which transfer title and risk of loss at a specified location, typically shipping point, port of loading or port of
discharge, depending on the final destination of the goods. Revenue recognition from product sales occurs when all factors are met, including transfer of title and risk of loss, which occurs either
upon shipment by us or upon receipt by customers at the location
specified in the terms of sale. Other than standard product warranty provisions, our sales arrangements provide for no other, or insignificant, post-shipment obligations. We do offer
rebates and other sales incentives, promotional allowances or discounts, from time to time and for certain customers, typically related to customer purchase volume, all of which are fixed or
determinable and are classified as a reduction of revenue and recorded at the time of sale. We periodically evaluate whether an allowance for sales returns is necessary. Historically, we have
experienced little, if any, sales returns. If we believe there are potential sales returns, we would provide any necessary provision against sales.

Accounts Receivable and Allowance for Doubtful Accounts

Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. Analysis of customer history,
financial data and the overall economic environment is performed. In addition, balances outstanding for more than 90 days are evaluated for possible inclusion in the accounts receivable
reserve. Collection agencies may also be utilized if management so determines.

We
record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. We also record as an additional allowance a certain
percentage of aged accounts receivable, based on historical experience and our assessment of the general financial conditions affecting our customer base. If actual collection experience changes,
revisions to the allowance may be required. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in the creditworthiness
of any of these customers could have a material affect on our results of operations in the period in which such changes

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or
events occur. After all reasonable attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance. Based on the information available, we
believe that our allowance for doubtful accounts as of December 31, 2007 was adequate. However, actual write-offs might exceed the recorded allowance.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method or the weighted average
method. The inventory balance, which includes materials, labor and manufacturing overhead costs, is recorded net of an allowance for obsolete or unmarketable inventory. Such allowance is based upon
both historical experience and management's understanding of market conditions and forecasts of future product demand. In addition, items in inventory in excess of one year's usage are compared to the
allowance for adequacy. If the actual
amount of obsolete or unmarketable inventory significantly exceeds the estimated allowance, our cost of sales, gross profit and net earnings would be significantly affected.

Goodwill and Other Intangible Assets

Goodwill is carried at cost. Goodwill is not amortized but is subject to an annual test for impairment at the reporting unit level (operating segment or one level
below an operating segment) and between annual tests in certain circumstances. In accordance with Statement of Financial Accounting Standards No. 142,Goodwill and Other
Intangible Assets("SFAS 142"), we test goodwill for impairment on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment might
exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with the reporting
unit's carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the expected present
value of future cash flows and the market valuation approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the Company performs the second step of the goodwill
impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying
amount of that goodwill.

Intangible
assets other than goodwill are carried at cost less accumulated amortization. Intangible assets are generally amortized on a straight-line basis over the useful
lives of the respective assets, generally five to twenty-five years. Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted
future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that
management expects to hold and use is based on the amount the carrying value exceeds the fair value of the asset.

In
July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 ("SFAS 141"). SFAS 141 replaced
Accounting Principles Board ("APB") Opinion 16 "Business Combination" and requires the use of the purchase method for all business combinations initiated after June 30, 2001.

ACQUISITIONS

Hy-Tech
Machine, Inc.

On
February 14, 2007, pursuant to an Asset Purchase Agreement (the "Hy-Tech APA") effective as of February 12, 2007, Hy-Tech acquired substantially
all of the assets (the "Hy-Tech Purchased

12

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Property")
of Hy-Tech Machine, Inc., a Pennsylvania corporation, and Quality Gear & Machine, Inc., a Pennsylvania corporation (collectively, the "Hy-Tech
Sellers"). The purchase price consisted of $16,900,000 in cash, subject to adjustments, plus the assumption of certain payables and liabilities and the obligation to make certain contingent payments
based on factors described in the Hy-Tech APA. The purchase price was negotiated on the basis of the Hy-Tech Sellers historical financial performance. The Hy-Tech
Purchased Property was used by the Hy-Tech Sellers in the business of, among other things, manufacturing and selling pneumatic tools and other tool products.

In
connection with this acquisition, Hy-Tech contemporaneously entered into an Agreement of Sale with HTM Associates, a Pennsylvania general partnership comprised of certain
shareholders of the Hy-Tech Sellers ("HTM"), pursuant to which Hy-Tech purchased certain real property located in Cranberry Township, Pennsylvania from HTM for $2,200,000 in
cash. The acquisition of the Hy-Tech Purchased Property and the real property was financed through our senior credit facility. (See Notes 2 and 9 to the Notes to Consolidated
Financial Statements.)

Pacific
Stair Products, Inc.

Pursuant
to an Asset Purchase Agreement (the "PSP APA"), dated December 20, 2005, between Pacific Stair Products, a California corporation ("Old PSP"), and Pacific Stair
Products, Inc., a then newly-formed Delaware corporation ("Pacific Stair") and 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, subject to adjustments, plus the assumption of certain liabilities and obligations by
Pacific Stair. The assets purchased included, among others, accounts receivable, inventory, machinery and equipment and certain intangibles. Pacific Stair is a manufacturer of premium stair rail
products and a distributor of staircase components to the building industry, primarily in southern California and the southwestern region of the United States. As a result of this transaction,
Countrywide increased its purchasing power and geographic distribution. The acquisition was financed through our credit facility. (See Note 9 to the Notes to Consolidated Financial Statements.)

DISCONTINUED OPERATIONS

Green

Green was primarily engaged in the manufacture, development and sale of heavy-duty welded custom designed hydraulic cylinders sold for use as
integrated components on a variety of equipment and machinery manufactured by others. Green also manufactured a line of access equipment for the petro-chemical and bulk storage industries. This
product line consisted of bridges, platforms, walkways and stairways, constructed of steel or aluminum and generally installed outdoors. In addition, Green marketed a small line of diggers used
primarily as attachments to small tractors for light farm work. This product line was marketed through farm equipment dealers and wholesalers. We sold the principal assets of Green between December
2004 and July 2005 in three transactions pursuant to three separate asset purchase agreements with non-affiliated third parties.

Embassy

Embassy was engaged in the manufacture and sale of baseboard heating products, sold nationally for use in hot-water heating systems installed in
single family homes, multi-unit dwellings and commercial and industrial buildings. Embassy's products were sold principally to wholesalers by manufacturers' representatives and
in-house sales personnel. Embassy's products were also sold to other manufacturers for incorporation into their products and for distribution on a private-label basis. Embassy also
imported a line of radiant heating systems. These systems include the tubing, manifolds, controls and installation supplies. Embassy also provided computer software that aids in the design of

13

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the
system. In October 2005, Embassy sold substantially all of its operating assets, including, among others, machinery and equipment, inventory, accounts receivable and certain intangibles, to a
non-affiliated third party. In June 2007, Embassy sold the real property to a different non-affiliated third party.

The
following amounts related to Embassy and Green have been segregated from the Company's continuing operations and are reported as assets held for sale and assets and liabilities of
discontinued operations in the consolidated balance sheets:

December 31,2007

2006Asset held for sale and assets of discontinued operations:Current:Prepaid expenses

$
56,000

$
350,000Asset held for sale





577,000Sub-total


56,000


927,000Long-term:Other receivable


9,000


40,000Total assets held for sale and assets of discontinued operations

$
65,000

$
967,000Liabilities of discontinued operations:Current:Accounts payable and accrued expenses

$
30,000

$
190,000Mortgage payable





1,254,000Sub-total


30,000


1,444,000Long-term:Pension Obligation


342,000


353,000Total liabilities of discontinued operations

$
372,000

$
1,797,000


Results
of operations for Embassy and Green are included from the beginning of each fiscal period presented through the respective dates of asset disposition, and have been segregated
from continuing operations and reflected as discontinued operations approximately as follows:

Year Ended December 31,2007

2006Net revenue

$


$
Earnings (loss) from operation of discontinued operations, before taxes

$
119,000

$
17,000Income tax (expense) benefit


(27,000
)

53,000Earnings (loss) from operation of discontinued operations


92,000


70,000Gain on sale of discontinued operations, before taxes


5,095,000


Income tax expense


(2,058,000
)

Gain on sale of discontinued operations


3,037,000


Earnings from discontinued operations

$
3,129,000

$
70,000


14

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RESULTS OF OPERATIONS

2007 compared to 2006

The table below presents our net revenue for the years presented.

|             |       | Year Ended December 31, |             | Change     |           
|------------ | ----- | ----------------------- | ----------- | ---------- | ----------
|
|Tools        |       |                         |             |            |           
|             |       | Florida Pneumatic       |             | $          | 44,374,000
|             |       | Hy-Tech                 |             |            | 14,940,000
|             |       |                         |             |            |           
|             | Total |                         | $           | 59,314,000 |           
|             |       |                         |             |            |           
|Hardware     |       |                         |             |            |           
|             |       | Woodmark                |             | $          | 31,852,000
|             |       | Pacific Stair           |             |            | 3,681,000 
|             |       | Nationwide              |             |            | 15,978,000
|             |       |                         |             |            |           
|             | Total |                         | $           | 51,511,000 |           
|             |       |                         |             |            |           
|Consolidated |       | $                       | 110,825,000 |            | $         
|             |       |                         |             |            |           

REVENUE



Revenue for the Tools segment increased $14,657,000 primarily the result of the acquisition of Hy-Tech which occurred in February 2007 and contributed
$14,940,000. Hy-Tech markets its products primarily to the pneumatic air tool industrial sector. The decrease in Florida Pneumatic's revenue of $283,000 resulted from a decrease in retail
sales of $386,000 and a decrease of $694,000 in Berkley, automotive, filters, and OEM sales, offset by an increase of $677,000 in sales at Franklin, as a result of increased sales to a large customer,
and an increase of $120,000 in industrial sales, primarily attributable to additional new products added during the year.



As previously noted, this segment has been hardest hit by the continuing down-turn in the number of new homes being constructed. For the year ended
December 31, 2007, revenue generated through the sale of our stair products was $29,707,000, a decrease of $10,066,000 or approximately 25.3% when compared to $39,773,000 reported for the year
ended December 31, 2006. Similarly, sales of our kitchen & bath products decreased $3,519,000 or 38% when comparing this year's results of $5,825,000 to that of the prior year results of
$9,344,000.

The
decrease at Nationwide we believe is also related to the sluggish real estate market in the southeastern portion of the U.S.A., as well as increased competitive pressures. When
comparing the revenue generated for the years ending December 31, 2007 to 2006, from Nationwide, which markets patio, fence and OEM products, there were decreases of $1,261,000 or 45%; $235,000
or 2% and $484,000 or 11% respectively. In the aggregate, revenue, on a year over year basis, slid $1,980,000 or 11% to $15,978,000 in 2007 from $17,958,000 in 2006.

15

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GROSS MARGIN

|                                 |  | Year Ended December 31, |  | Change     
|-------------------------------- |  | ----------------------- |  | -----------
|
|Tools                            |  | $17,090,000             |  | $13,129,000
|As percent of respective revenue |  | 28.8%                   |  | 29.4%      
|Hardware                         |  | $15,752,000             |  | $20,852,000
|As percent of respective revenue |  | 30.6%                   |  | 31.1%      
|Consolidated                     |  | $32,842,000             |  | $33,981,000
|As percent of respective revenue |  | 29.6%                   |  | 30.4%      



Gross margin percentage at Florida Pneumatic decreased to 26.0% for the year ended December 31, 2007, a decrease of 3.4% points from 29.4% for the year
ended December 31, 2006. This was principally the result of: (i) price concessions to a major retail customer and (ii) decreased shipments to another retailer which adversely
affected fixed manufacturing/warehouse overhead absorption. Further, our mix of products shifted during 2007 compared to 2006. During 2007, Florida Pneumatic sold more promotional items than in the
prior year, adversely contributing to the gross margin. It should be noted that while price concessions were granted, revenue generated from this customer increased $1,263,000, or 6.4%. Also
contributing to the decrease in gross margin were increases in raw materials adversely affecting gross margin at our Franklin hardware division. Hy-Tech's results of operations are from
February 12, 2007, the effective date of the acquisition. Its gross margins for the period commencing with date of acquisition through December 31, 2007 of $5,657,000 or 37.3% are
generally in line with its historical results.



Gross margin as a percent of respective net revenue for the stairs products sold within this segment of 35.9% reflects a increase of 1.7% points from 34.2% for
the year ended December 31, 2006. Specifically, gross margin at Pacific Stair for the year ended December 31, 2007 was 1.7%, down from the prior year percentage of 39.0%. This decrease
is due primarily to severe under absorption of fixed costs. Stair sales at Woodmark generated a gross margin of 35.7% for the year ended December 31, 2007, an increase of 2.4%. The most
significant factor contributing to the gross margin percentage improvement was the proportionate increase in shipments from our warehouses with a corresponding decrease of direct or full container
sales. Product shipped directly from our warehouses will generate higher gross margin percentages than full container drop-shipped orders. During 2007, we shipped more products directly
from our warehouse than during 2006, resulting in the gross margin percentage reported for the year ended December 31, 2007 to be greater than that of the prior year. Gross profit for the
kitchen and bath product line as a percentage of revenue increased 1% when comparing the years ended December 31, 2007 and 2006.

Our
gross margin at Nationwide of 38.1% for the year ended December 31, 2007 reflects a decrease of 3.8% from the 41.9% reported for the year ended December 31, 2006. This
decrease is primarily due to increases in our cost of sales. The cost increases arose early in 2007 in steel, zinc and aluminum products imported from our Pacific rim vendors. In general, our selling
prices were held constant. However, in some instances we were required to lower our selling prices in highly competitive situations to key customers.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") include salaries and related costs, commissions, travel, administrative facilities, communications costs and
promotional expenses for our

16

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direct
sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as amortization and depreciation and general
corporate overhead and certain engineering expenses.

Consolidated
SG&A were $28,100,000 for the year ended December 31, 2007, an increase of $2,571,000 when compared to $25,529,000 incurred during the year ended December 31,
2006. Additionally, as a percentage of revenue, for the year ended December 31, 2007 SG&A increased to 25.4% from 22.8% for the prior year. A key factor affecting the fluctuation in SG&A was
the acquisition of Hy-Tech in February 2007, which added $2,949,000 of SG&A during 2007. Excluding Hy-Tech's impact, our SG&A for the full year ended December 31, 2007
decreased
approximately $272,000 from the prior year. Items affecting our SG&A include reductions in commissions, travel, professional fees and depreciation, offset by increases in bad debts expenses and
salaries. However, excluding Hy-tech's revenue and SG&A from the year ended December 31, 2007 totals, our SG&A as a percentage of revenue would have been 26.4%, 3.6% points higher
than SG&A as a percentage of 2006 revenue. This percentage increase is primarily due to the fact that most of our SG&A expenses are fixed.

Impairment of goodwill and other intangible assets

In accordance with the provisions of SFAS 142, we recorded an impairment charge of $23,462,000 relating to goodwill and other intangible assets during the
fourth quarter of 2007. During 2007 the country witnessed a deteriorating new home construction sector. This was compounded by general sluggishness in sectors of the economy that directly drive our
businesses, sales degradation and pricing concessions to certain key customers within our Tools segment and the loss of key customers in our Hardware segment. As a result, certain of our subsidiaries
were unable to demonstrate an ability to generate sufficient discounted future cash flows to support the recorded amounts of goodwill, other intangible assets and other long-lived assets
related to those subsidiaries, necessitating the aggregate impairment charge. If the sectors in which our subsidiaries operate, including among other things, new home construction further declines, we
could incur additional impairment charges in future periods.

Interest expensenet

Net interest expense increased $945,000, or 47.9%, from approximately $1,973,000 incurred during the year ended December 31, 2006 to approximately
$2,918,000 for the year ended December 31, 2007. Interest expense of approximately $986,000 on the borrowings associated with the Hy-Tech acquisition was the primary factor for the
increase. Other components include: (i) Interest expense on borrowings under our revolving credit loan facility was $607,000, a $179,000 increase over the prior year, as lower average
borrowings were adversely impacted by higher average interest rates; (ii) Interest expense on trade financing at Florida Pneumatic increased approximately $72,000 as a result of higher average
borrowings and higher interest rates; (iii) Interest expense on borrowings under the term loan facility relating to the Woodmark acquisition decreased by approximately $206,000 as lower average
borrowings during the period due to repayments were offset by slightly higher average interest rates and (iv) Interest expense on Woodmark's acquisition-related notes decreased by approximately
$88,000 as these notes were settled during 2007.

Income taxes

The effective tax rates applicable to (loss) earnings from continuing operations for the years ended December 31, 2007 and 2006 were (20.4)% and 41.2%,
respectively. We generally apply a standard tax rate to our (loss) earnings. The key factor affecting the current year's effective tax rate was the asset impairment charges recorded in accordance with
SFAS 142. The effective tax rates applicable to earnings from continuing operations for the year ended December 31, 2006 exceeded our standard rate

17

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primarily
due to an unexpected accrual for an uncertain tax position resulting from a then pending state audit, which was settled in 2007.

DISCONTINUED OPERATIONS

Embassy effectively ceased all operating activities during 2006. In June 2007 Embassy received $6,300,000 for the sale of real property and used the
after-tax proceeds to satisfy the mortgage on the building of approximately $1,200,000 and reduce its long-term debt. We reported a pre-tax gain from the sale of
approximately $5,100,000. We sold the principal assets of Green between December 2004 and July 2005 in three transactions pursuant to three separate asset purchase agreements with
non-affiliated third parties.

LIQUIDITY AND CAPITAL RESOURCES

Our cash flows from operations can be somewhat cyclical, typically with the greatest demand in the second and third quarters followed by positive cash flows in
the fourth quarter as receivables and inventories trend down. Due to our strong asset base, predictable cash flows and favorable banking relationships, we believe we have adequate access to capital,
if and when needed. We monitor average days sales outstanding, inventory turns and capital expenditures to project liquidity needs and evaluate return on assets employed.

We
gauge our liquidity and financial stability by the measurements shown in the following table:

December 31,2007

2006Working Capital

$
24,000,000

$
21,168,000Current Ratio


1.95 to 1


1.83 to 1Shareholders' Equity

$
37,986,000

$
51,521,000


In
connection with our acquisition of Woodmark in 2004, we are potentially liable for additional payments to the sellers. Should the amount of Woodmark's earnings before interest and
taxes for the year ending December 31, 2008 exceed $5,100,000, Woodmark would be required to make a payment in an amount equal to 40% of this excess on June 30, 2009. Any such additional
payment will be treated as additional goodwill.

Contemporaneously
with the acquisition of Hy-Tech in February 2007, we executed and delivered Amendment No. 7 to Credit Agreement with the banks. The amendment, among
other things, added Continental Tool Group, Inc. and Hy-Tech Machine, Inc. as additional co-borrowers and provides for new term loans in amounts not to exceed
$19,000,000. Commencing on January 31, 2008 the principal on this new term loan note shall be payable in 25 consecutive quarterly installments of 1/25 of the aggregate principal
amount outstanding as at January 31, 2008. From the date of the amendment through January 31, 2008, we were to make payments consisting of interest only. However during the fourth
quarter of 2007 we paid down $5,000,000 of this term loan by increasing our borrowings under the short tem credit facility. This new term loan note shall mature on January 31, 2014. The
amendment also provides for the amendment and restatement of certain existing term loan notes. We have the option to pay interest at a rate based on either the fluctuating prime rate, LIBOR (London
InterBank Offered Rate) or a combination of the two rates.

The
revolving credit loan facility provides for a maximum of $18,000,000, with various sublimits, for direct borrowings, letters of credit, bankers' acceptances and equipment loans.
Direct borrowings under the revolving credit loan facility are secured by our accounts receivable, inventory and equipment and are cross-guaranteed by each of our subsidiaries. These borrowings bear
interest at either LIBOR plus the currently applicable loan margin or the prime interest rate. At December 31, 2007 and December 31, 2006, the applicable loan margins added to LIBOR were
1.75% and 1.45%, respectively.

18

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At
December 31, 2007, and December 31, 2006, the balances outstanding on the revolving credit loan facility were $8,000,000 and $3,000,000, respectively. There are no commitment fees for
any unused portion of this credit facility and there were no open letters of credit at December 31, 2007.

The
foreign exchange line provides for the availability of up to $10,000,000 in foreign currency forward contracts. These contracts fix the exchange rate on future purchases of Japanese
yen needed for payments to foreign suppliers. The total amount of foreign currency forward contracts outstanding under the foreign exchange line at December 31, 2007 based on that day's closing
spot rate, was approximately $252,000.

Under
the terms of the credit agreement, we are required to adhere to certain financial covenants. At December 31, 2007, we were not in compliance with one of the financial
covenants. Subsequent to December 31, 2007, the banks waived compliance with such financial covenant.

We
anticipate that we may not be in compliance with a financial covenant during 2008. However, based upon discussions with the banks, we are confident that the banks will waive our
noncompliance of this financial covenant at March 31, 2008 and amend the credit agreement. We believe that such amendment to the credit agreement will enable us to be in compliance with this
covenant in future periods. Accordingly, we have not reclassified to current liabilities the long-term portions of our bank debts. However, there can be no assurances that we will be able
to secure such amendment.

Embassy
participated in a multi-employer pension plan until it sold substantially all of its operating assets in October 2005. This plan provided defined benefits to all of its union
workers. Contributions to this plan were determined by the union contract. Embassy does not administer the plan funds and does not have any control over the plan funds. As a result of Embassy's
withdrawal from the plan, it recorded the net present value of a withdrawal liability of approximately $369,000, which is payable in quarterly installments of approximately $8,200 from May 2006
through February 2026. The balance at December 31, 2007 was $342,000 and is reported in Liabilities of Discontinued Operations. Further, in connection with our sale of Embassy, we recorded the
net present value of a receivable of approximately $90,000, which is scheduled to be collected at approximately $8,200 per quarter from May 2006 through May 2009.

In
June 2007, Embassy received $6,300,000 for the sale of real property and used the after-tax proceeds to satisfy the mortgage on the building of approximately $1,200,000
and reduce its long-term debt. We reported a pre-tax gain from the sale of approximately $5,100,000.

Cash
decreased $6,000 from $1,340,000 as of December 31, 2006 to $1,334,000 as of December 31, 2007. Our total borrowings increased from $22,619,000 at December 31,
2006 to $34,049,000 at December 31, 2007, due primarily to borrowings in connection with the acquisition of Hy-Tech. Cash provided by operating activities of continuing operations
for the years ended December 31, 2007 and 2006 were approximately $7,791,000, and $11,553,000, respectively. We believe that cash on hand derived from operations and cash available through
borrowings under our credit facilities will be sufficient to allow us to meet our foreseeable working capital needs.

The
total percent of debt to total book capitalization (debt plus equity) increased from 30.5% at December 31, 2006 to 47.3% at December 31, 2007.

Capital
spending was approximately $1,301,000 and $1,549,000 for the years ended December 31, 2007 and December 31, 2006, respectively. Capital expenditures currently
planned for 2008 are expected to approximate $1,000,000, some of which may be financed through our credit facilities. Projected 2008 capital expenditures relate to new products, expansion of existing
product lines and replacement of equipment.

19

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OFF-BALANCE SHEET ARRANGEMENTS

Our foreign exchange line provides for the availability of up to $10,000,000 in foreign currency forward contracts. These contracts fix the exchange rate on
future purchases of foreign currencies needed for payments to foreign suppliers. We have not purchased forward contracts on New Taiwan dollars ("TWD"). The total amount of foreign currency forward
contracts outstanding at December 31, 2007, based on that day's closing spot rate, was approximately $252,000.

Florida
Pneumatic imports approximately 8% of its purchases from Japan, with payment due in Japanese yen. As a result, we are subject to the effects of foreign currency exchange
fluctuations. We use a variety of techniques to protect ourselves from any adverse effects from these fluctuations, including increasing selling prices, obtaining price reductions from our overseas
suppliers, using alternative supplier sources and entering into foreign currency forward contracts. During the year ended December 31, 2007, the relative values of the U.S dollar in relation to
the Japanese yen, and to a
lesser extent the TWD, were just slightly above fiscal 2007 averages. There can be no assurance as to the future trend of this value.

IMPACT OF INFLATION

We believe that the effects of changing prices and inflation on our financial position and its results of operations are immaterial.

ENVIRONMENTAL MATTERS

Although it is difficult to identify precisely the portion of capital expenditures or other costs attributable to compliance with environmental laws and
regulations, we do not expect such expenditures or other costs to have a material adverse effect on our financial position and its results of operations.

NEW ACCOUNTING PRONOUNCEMENTS



In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid Financial
Instrumentsan amendment of Financial Accounting Standards (SFAS) SFAS No. 133 and 140." SFAS No. 155 allows companies to elect to measure at fair value entire financial
instruments containing embedded derivatives that would otherwise have to be accounted for separately. It also requires companies to identify interests in securitized financial assets that are
freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest- and principal-only strips are subject to SFAS
No. 133, and amends SFAS No. 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets
are freestanding derivatives or contain embedded derivatives. SFAS No. 155 was effective for all financial instruments acquired, issued or subject to a remeasurement event after the beginning
of a company's first fiscal year that began after September 15, 2006. The adoption of this statement did not have a material effect on our financial position or results of operations.

In
March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assetsan amendment of SFAS No. 140." SFAS No. 156 requires the
recognition of a servicing asset or liability each time a company undertakes an obligation to service a financial asset in certain situations. It requires all separately recognized servicing assets
and liabilities to be initially measured at fair value, if practical. SFAS No. 156 was effective as of the beginning of a company's first fiscal year that began after September 15, 2006.
The adoption of this statement did not have a material effect on our financial position or results of operations.

20

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Effect of Newly Issued But Not Yet Effective Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 provides a new single authoritative
definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 will become effective as of January 1,
2008. We are currently evaluating the impact that the adoption of SFAS 157 may have on our financial position or results of operations.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115",
("SFAS 159"). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
SFAS 159 is effective as of the beginning of fiscal 2008. We are currently evaluating the impact that the adoption of SFAS 159 may have on our financial position or results of
operations.

In
December 2007, the FASB issued Statement 141 (revised 2007),Business Combinations(Statement 141R) to change how an entity accounts
for the acquisition of a business. When effective, Statement 141R will replace existing Statement 141 in its entirety. Statement 141R carries forward the existing requirements to account for all
business combinations using the acquisition method (formerly called the purchase method). In general, Statement 141R will require acquisition-date fair value measurement of identifiable
assets acquired, liabilities assumed, and non-controlling interests in the acquiree. Statement 141R will eliminate the current cost-based purchase method under Statement 141. The
new measurement requirements will result in the recognition of the full amount of acquisition-date goodwill, which includes amounts attributable to non-controlling interests.
The acquirer will recognize in income any gain or loss on the remeasurement to acquisition-date fair value of consideration transferred or of previously acquired equity interests in the
acquiree. Neither the direct costs incurred to effect a business combination nor the costs the acquirer expects to incur under a plan to restructure an
acquired business will be included as part of the business combination accounting. As a result, those costs will be charged to expense when incurred, except for debt or equity issuance costs, which
will be accounted for in accordance with other generally accepted accounting principles. Statement 141R will also change the accounting for contingent consideration, in process research and
development, contingencies, and restructuring costs. In addition, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination that occur after
the measurement period will impact income taxes under Statement 141R. Statement 141R is effective for fiscal years and interim periods within those fiscal years beginning on or after
December 15, 2008. Early adoption is prohibited. We intend to adopt Statement 141R effective January 1, 2009 and apply its provisions prospectively. We are evaluating the impact that the
adoption of Statement 141R will have on our financial statements.

In
December 2007, the SEC staff issued Staff Accounting Bulletin (SAB) 110,Share-Based Payment, which amends SAB 107, Share-Based Payment, to permit
public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants
after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees' exercise behavior does not provide a
reasonable basis for estimating the expected term of the options. We currently use the simplified method to estimate the expected term for employee option grants as adequate historical experience is
not available to provide a reasonable estimate. SAB 110 is effective for employee options granted after December 31, 2007. We intend to adopt SAB 110 effective January 1,
2008 and continue applying the simplified method until enough historical experience is readily available to provide a reasonable estimate of the expected term for employee option grants.

21

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In
December 2007, the FASB issued Statement 160,Non-controlling Interests in Consolidated Financial Statements: an amendment of ARB
No. 51. The new Statement changes the accounting for, and the financial statement presentation of, non-controlling equity interests in a consolidated
subsidiary. Statement 160 replaces the existing minority-interest provisions of Accounting Research Bulletin (ARB) 51,Consolidated Financial
Statements, by defining a new termnon-controlling intereststo replace what were previously
calledminority interests. The new standard establishesnon-controlling interestsas a
component of the equity of a consolidated entity. The underlying principle of the new standard is that both the controlling interest and the non-controlling interests are part of the
equity of a single economic entity: the consolidated reporting entity. Classifying non-controlling interests as a component of consolidated equity is a change from the current practice of
treating minority interests as a mezzanine item between liabilities and equity or as a liability. The change affects both the accounting and financial reporting for non-controlling
interests in a consolidated subsidiary. Statement 160 includes reporting requirements intended to clearly identify and differentiate the interests of the parent and the interests of the
non-controlling owners. The reporting requirements are required to be applied retrospectively. Statement 160 is effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. Early adoption is prohibited. We intend to adopt Statement 160 effective January 1, 2009 and apply its provisions prospectively. We will also
present comparative financial statements that reflect the retrospective application of the disclosure and presentation provisions when it applies the requirements
of Statement 160. We are evaluating the impact that the adoption of Statement 160 will have on its financial statements.

ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

Not Required

22

---





ITEM 8.    Financial Statements

P&F INDUSTRIES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  AND SUPPLEMENTARY DATA



|                                                                                               |  | Page
|---------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                        |  | 24  
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                   |  | 25  
|Consolidated Statements of Operations for the years ended December 31, 2007 and 2006           |  | 26  
|Consolidated Statements of Shareholders' Equity for the years ended December 31, 2007 and 2006 |  | 27  
|Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006           |  | 28  
|Notes to Consolidated Financial Statements                                                     |  | 31  
|Schedule IIValuation and Qualifying Accounts for the years ended December 31, 2007 and 2006   |  | 61  

23

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Shareholders and Board of Directors
P&F Industries, Inc.

We
have audited the accompanying consolidated balance sheets of P&F Industries, Inc. and Subsidiaries (the "Company") as of December 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. Our audits of the basic financial statements included the financial statement
Schedule IIValuation and Qualifying Accounts, as of and for the years ended December 31, 2007 and 2006 ("financial statement schedule"). These financial statements and
financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of P&F Industries, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/
Grant Thornton LLP
Melville, New York
March 27, 2008

24

---





P&F INDUSTRIES, INC. AND SUBSIDIARIES    CONSOLIDATED BALANCE SHEETS

|                                        |                                                                             | December 31,                                                                                     |                          
|--------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------------------
|
|ASSETS                                  |                                                                             |                                                                                                  |                          
|CURRENT                                 |                                                                             |                                                                                                  |                          
|                                        | Cash                                                                        |                                                                                                  | $                        
|                                        | Accounts receivablenet                                                     |                                                                                                  |                          
|                                        | Notes and other receivables                                                 |                                                                                                  |                          
|                                        | Inventoriesnet                                                             |                                                                                                  |                          
|                                        | Deferred income taxesnet                                                   |                                                                                                  |                          
|                                        | Asset held for sale                                                         |                                                                                                  |                          
|                                        | Assets of discontinued operations                                           |                                                                                                  |                          
|                                        | Income tax refund receivable                                                |                                                                                                  |                          
|                                        | Prepaid expenses and other current assets                                   |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             | TOTAL CURRENT ASSETS                                                                             |                          
|                                        |                                                                             |                                                                                                  |                          
|PROPERTY AND EQUIPMENT                  |                                                                             |                                                                                                  |                          
|                                        | Land                                                                        |                                                                                                  |                          
|                                        | Buildings and improvements                                                  |                                                                                                  |                          
|                                        | Machinery and equipment                                                     |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  | 24,726,365               
|                                        | Less accumulated depreciation and amortization                              |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             | NET PROPERTY AND EQUIPMENT                                                                       |                          
|GOODWILL                                |                                                                             |                                                                                                  | 4,594,028                
|OTHER INTANGIBLE ASSETSnet             |                                                                             |                                                                                                  | 11,103,534               
|DEFERRED INCOME TAXESnet               |                                                                             |                                                                                                  | 3,445,000                
|ASSETS OF DISCONTINUED OPERATIONS       |                                                                             |                                                                                                  | 9,400                    
|OTHER ASSETSnet                        |                                                                             |                                                                                                  | 204,684                  
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             | TOTAL ASSETS                                                                                     |                          
|                                        |                                                                             |                                                                                                  |                          
|LIABILITIES AND SHAREHOLDERS' EQUITY    |                                                                             |                                                                                                  |                          
|CURRENT LIABILITIES                     |                                                                             |                                                                                                  |                          
|                                        | Short-term borrowings                                                       |                                                                                                  | $                        
|                                        | Accounts payable                                                            |                                                                                                  |                          
|                                        | Income taxes payable                                                        |                                                                                                  |                          
|                                        | Accrued compensation                                                        |                                                                                                  |                          
|                                        | Other accrued liabilities                                                   |                                                                                                  |                          
|                                        | Current maturities of long-term debt                                        |                                                                                                  |                          
|                                        | Liabilities of discontinued operations                                      |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  | TOTAL CURRENT LIABILITIES
|LONG-TERM DEBT, less current maturities |                                                                             |                                                                                                  | 19,744,173               
|LIABILITIES OF DISCONTINUED OPERATIONS  |                                                                             |                                                                                                  | 342,367                  
|DEFERRED INCOME TAXESnet               |                                                                             |                                                                                                  |                         
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  | TOTAL LIABILITIES        
|                                        |                                                                             |                                                                                                  |                          
|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3,956,431 and 3,850,367 shares, respectively |                          
|                                        |                                                                             | Class B$1 par; authorized2,000,000 shares; no shares issued                                    |                          
|                                        | Additional paid-in capital                                                  |                                                                                                  |                          
|                                        | Retained earnings                                                           |                                                                                                  |                          
|                                        | Treasury stock, at cost (318,969 and 272,607 shares, respectively)          |                                                                                                  |                          
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             | TOTAL SHAREHOLDERS' EQUITY                                                                       |                          
|                                        |                                                                             |                                                                                                  |                          
|                                        |                                                                             | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                       |                          
|                                        |                                                                             |                                                                                                  |                          

The accompanying notes are an integral part of these consolidated financial statements.

25

---



P&F INDUSTRIES, INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                          |                                                                                              | Year Ended December 31,                                                                                                    
|------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------
|
|Net revenue                                                               |                                                                                              | $                                                                                                                          
|Cost of sales                                                             |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|Gross profit                                                              |                                                                                              |                                                                                                                            
|Selling, general and administrative expenses                              |                                                                                              |                                                                                                                            
|Impairment of goodwill and other intangible assets                        |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|Operating (loss) income                                                   |                                                                                              |                                                                                                                            
|Interest expensenet                                                      |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|(Loss) earnings from continuing operations before income taxes            |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              | Income tax (benefit) expense                                                                                               
|                                                                          |                                                                                              |                                                                                                                            
|(Loss) earnings from continuing operations before discontinued operations |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|Discontinued operations (net of taxes):                                   |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              | Earnings from operation of discontinued operations (net of tax expense of $27,000 in 2007 and (benefit) of $53,000 in 2006)
|                                                                          | Gain on sale of asset of discontinued operations (net of tax expense of $2,058,000 for 2007) |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              | Earnings from discontinued operations                                                                                      
|                                                                          |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              | Net (loss) earnings                                                                                                        
|                                                                          |                                                                                              |                                                                                                                            
|Basic (loss) earnings per common share:                                   |                                                                                              |                                                                                                                            
|                                                                          | Continuing operations                                                                        |                                                                                                                            
|                                                                          | Discontinued operations                                                                      |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              | $                                                                                                                          
|                                                                          |                                                                                              |                                                                                                                            
|Diluted (loss) earnings per common share:                                 |                                                                                              |                                                                                                                            
|                                                                          | Continuing operations                                                                        |                                                                                                                            
|                                                                          | Discontinued operations                                                                      |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              | $                                                                                                                          
|                                                                          |                                                                                              |                                                                                                                            
|Weighted average common shares outstanding:                               |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            
|                                                                          |                                                                                              |                                                                                                                            

The
accompanying notes are an integral part of these consolidated financial statements.

26

---



P&F INDUSTRIES, INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                                                |  |   |             | Class A Common Stock, $1 Par |           |  |   |           |  |   |            |  |  
|--------------------------------------------------------------- |  | - | ----------- | ---------------------------- | --------- |  | - | --------- |  | - | ---------- |  | -
|
|
|
|BalanceJanuary 1, 2006                                         |  | $ | 47,716,210  |                              | 3,814,367 |  | $ | 3,814,367 |  | $ | 8,947,855  |  | $
|Net earnings                                                    |  |   | 3,881,265   |                              |          |  |   |          |  |   |           |  |  
|Issuance of Class A common stock upon exercise of stock options |  |   | 208,580     |                              | 36,000    |  |   | 36,000    |  |   | 172,580    |  |  
|Shares surrendered as payment for exercise of stock options     |  |   | (61,850     | )                            |          |  |   |          |  |   |           |  |  
|Purchase of Class A common Stock                                |  |   | (294,196    | )                            |          |  |   |          |  |   |           |  |  
|Stock-based compensation                                        |  |   | 71,163      |                              |          |  |   |          |  |   | 71,163     |  |  
|                                                                |  |   |             |                              |           |  |   |           |  |   |            |  |  
|BalanceDecember 31, 2006                                       |  |   | 51,521,172  |                              | 3,850,367 |  |   | 3,850,367 |  |   | 9,191,598  |  |  
|Net loss                                                        |  |   | (14,093,870 | )                            |           |  |   |           |  |   |            |  |  
|Issuance of Class A common stock upon exercise of stock options |  |   | 644,967     |                              | 106,064   |  |   | 106,064   |  |   | 538,903    |  |  
|Shares surrendered as payment for exercise of stock options     |  |   | (522,611    | )                            |          |  |   |          |  |   |           |  |  
|Tax benefits from exercise of stock options                     |  |   | 84,000      |                              |          |  |   |          |  |   | 84,000     |  |  
|Stock-based compensation                                        |  |   | 352,161     |                              |          |  |   |          |  |   | 352,161    |  |  
|                                                                |  |   |             |                              |           |  |   |           |  |   |            |  |  
|BalanceDecember 31, 2007                                       |  | $ | 37,985,819  |                              | 3,956,431 |  | $ | 3,956,431 |  | $ | 10,166,662 |  | $
|                                                                |  |   |             |                              |           |  |   |           |  |   |            |  |  

The accompanying notes are an integral part of these consolidated financial statements.

27

---



P&F INDUSTRIES, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                    |                                                                                                                     | Year ended December 31,                   |                                                   
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------
|
|Cash Flows from Operating Activities of Continuing Operations:                      |                                                                                                                     |                                           |                                                   
|Net (loss) earnings                                                                 |                                                                                                                     | $                                         | (14,093,870                                       
|                                                                                    |                                                                                                                     |                                           |                                                   
|                                                                                    |                                                                                                                     |                                           | Earnings from discontinued operationsnet of taxes
|                                                                                    | Adjustments to reconcile net (loss) earnings to net cash provided by operating activities of continuing operations: |                                           |                                                   
|                                                                                    | Non-cash charges and credits:                                                                                       |                                           |                                                   
|                                                                                    |                                                                                                                     |                                           | Depreciation and amortization                     
|                                                                                    |                                                                                                                     |                                           | Amortization of other intangible assets           
|                                                                                    |                                                                                                                     |                                           | Amortization of other assets                      
|                                                                                    |                                                                                                                     |                                           | Impairment of goodwill and other intangible assets
|                                                                                    |                                                                                                                     |                                           | Provision for losses on accounts receivablenet   
|                                                                                    |                                                                                                                     |                                           | Stock-based compensation                          
|                                                                                    |                                                                                                                     |                                           | Deferred income taxesnet                         
|                                                                                    |                                                                                                                     |                                           | (Gain) on disposal of fixed assets                
|Changes in operating assets and liabilities, net of assets and liabilities acquired |                                                                                                                     |                                           |                                                   
|                                                                                    |                                                                                                                     | Accounts receivable                       |                                                   
|                                                                                    |                                                                                                                     | Notes and other receivables               |                                                   
|                                                                                    |                                                                                                                     | Inventories                               |                                                   
|                                                                                    |                                                                                                                     | Income tax refund receivable              |                                                   
|                                                                                    |                                                                                                                     | Prepaid expenses and other current assets |                                                   
|                                                                                    |                                                                                                                     | Other assets                              |                                                   
|                                                                                    |                                                                                                                     | Accounts payable                          |                                                   
|                                                                                    |                                                                                                                     | Income taxes payable                      |                                                   
|                                                                                    |                                                                                                                     | Accruals and other                        |                                                   
|                                                                                    |                                                                                                                     |                                           |                                                   
|                                                                                    |                                                                                                                     |                                           |                                                   
|                                                                                    |                                                                                                                     |                                           |                                                   
|                                                                                    |                                                                                                                     |                                           |                                                   
|                                                                                    |                                                                                                                     |                                           |                                                   

The
accompanying notes are an integral part of these consolidated financial statements.

28

---



P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

|                                                               |                                                                                         | Year ended December 31,                                                      |          
|-------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---------
|
|Cash Flows from Investing Activities of Continuing Operations: |                                                                                         |                                                                              |          
|                                                               | Capital expenditures                                                                    |                                                                              | $        
|                                                               | Purchase of certain assets, net of certain liabilities, of Hy-Tech Machine, Inc.        |                                                                              |          
|                                                               | Purchase of certain assets, net of certain liabilities, of Pacific Stair Products, Inc. |                                                                              |          
|                                                               | Additional payments for acquisition-related expenses of Hy-Tech Machine, Inc.           |                                                                              |          
|                                                               | Additional purchase price adjustment of Hy-Tech Machine, Inc.                           |                                                                              |          
|                                                               | Additional payments for acquisition-related expenses of Pacific Stair Products, Inc.    |                                                                              |          
|                                                               | Additional purchase price adjustment of Pacific Stair Products, Inc.                    |                                                                              |          
|                                                               | Proceeds from disposal of fixed assets                                                  |                                                                              |          
|                                                               |                                                                                         |                                                                              |          
|                                                               |                                                                                         | Net cash used in investing activities of continuing operations               |          
|                                                               |                                                                                         |                                                                              |          
|Cash Flows from Financing Activities of Continuing Operations: |                                                                                         |                                                                              |          
|                                                               | Proceeds from short-term borrowings                                                     |                                                                              |          
|                                                               | Repayments of short-term borrowings                                                     |                                                                              |          
|                                                               | Proceeds from term loan                                                                 |                                                                              |          
|                                                               | Repayments of term loan                                                                 |                                                                              |          
|                                                               | Principal payments on long-term debt                                                    |                                                                              |          
|                                                               | Proceeds from exercise of stock options                                                 |                                                                              |          
|                                                               | Tax benefits from the exercise of stock options                                         |                                                                              |          
|                                                               | Purchase of Class A common stock                                                        |                                                                              |          
|                                                               |                                                                                         |                                                                              |          
|                                                               |                                                                                         | Net cash provided by (used in) financing activities of continuing operations |          
|                                                               |                                                                                         |                                                                              |          
|Cash Flows from Discontinued Operations:                       |                                                                                         |                                                                              |          
|                                                               | Net cash used in operating activities                                                   |                                                                              |          
|                                                               | Net cash provided by investing activities                                               |                                                                              |          
|                                                               | Net cash used in financing activities                                                   |                                                                              |          
|                                                               |                                                                                         |                                                                              |          
|                                                               |                                                                                         | Net cash provided by (used in) discontinued operations                       |          
|                                                               |                                                                                         |                                                                              |          
|NET DECREASE IN CASH                                           |                                                                                         |                                                                              | (5,715   
|Cash at beginning of year                                      |                                                                                         |                                                                              | 1,339,882
|                                                               |                                                                                         |                                                                              |          
|Cash at end of year                                            |                                                                                         | $                                                                            | 1,334,167
|                                                               |                                                                                         |                                                                              |          
|Supplemental disclosures of cash flow information:             |                                                                                         |                                                                              |          
|Cash paid for:                                                 |                                                                                         |                                                                              |          
|Interest                                                       |                                                                                         | $                                                                            | 3,137,000
|                                                               |                                                                                         |                                                                              |          
|Income taxes                                                   |                                                                                         | $                                                                            | 2,340,000
|                                                               |                                                                                         |                                                                              |          

The
accompanying notes are an integral part of these consolidated financial statements.

29

---



P&F INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Non-cash
investing and financing activities were as follows:

During
the year ended December 31, 2007, the Company received 46,362 shares of Class A Common Stock in connection with the exercise of options to purchase 96,664 shares of
Class A Common Stock. The value of these shares was recorded at $522,611.

During
the year ended December 31, 2006, the Company received 5,000 shares of Class A Common Stock in connection with the exercise of options to purchase 15,000 shares of
Class A Common Stock. The value of these shares was recorded at $61,850.

In
connection with the sale of certain assets of Embassy in October 2005, the Company recorded a receivable of approximately $1,233,000 related to escrow monies due, subject to certain
conditions of release, and a working capital adjustment. During 2006, the Company received approximately $833,000. The balance of $400,000 was collected during 2007.

In
connection with the sale of certain assets of Green's Agricultural Division in July 2005, the Company received interest-bearing promissory notes of approximately $305,000, as
adjusted. During 2006, these notes were satisfied.

In
connection with the sale of certain assets of Green's Access Division in February 2005, the Company received interest-bearing promissory notes of approximately $877,000, as adjusted.
During 2006, these notes were satisfied.

In
connection with the sale of certain assets of Green's Cylinder Division in December 2004, the Company received an interest bearing promissory note of approximately $686,000, payable
monthly through December 2005. In addition, the Company entered into a finished goods inventory purchase agreement with the buyer and recorded a receivable of approximately $889,000, which was
collected in 2006.

In
connection with the Company's acquisition of Woodmark in June 2004, the Company issued a note payable to the sellers in the amount of $1,218,000. The Company also assumed a note
payable to the sellers in the amount of $2,190,000, both of which were paid in 2007.

The
accompanying notes are an integral part of these consolidated financial statements.

30

---





P&F INDUSTRIES, INC. AND SUBSIDIARIES    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2007 and 2006

NOTE 1SUMMARY OF ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements contained herein include the accounts of P&F Industries, Inc. and its subsidiaries ("P&F"). All significant
intercompany balances and transactions have been eliminated.

P&F
conducts its business operations through two of its wholly-owned subsidiaries: Continental Tool Group, Inc. ("Continental") and Countrywide Hardware, Inc.
("Countrywide"). On June 29, 2007, P&F transferred its sole and direct ownership interest in Florida Pneumatic Manufacturing Corporation ("Florida Pneumatic") to Continental. 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.

Continental
conducts its business operations through Florida Pneumatic and Hy-Tech Machine, Inc., ("Hy-Tech"). Florida Pneumatic is engaged in the
importation, manufacture and sale of pneumatic hand tools, primarily for the industrial, retail and automotive markets, and the importation and sale of compressor air filters. Florida Pneumatic also
markets, through its Berkley Tool division ("Berkley"), a line of pipe cutting and threading tools, wrenches and replacement electrical components for a widely-used brand of pipe cutting
and threading machines. In addition, through its Franklin Manufacturing ("Franklin") division, Florida Pneumatic
imports a line of door and window hardware. In February 2007, Hy-Tech acquired substantially all of the operating assets of Hy-Tech Machine, Inc., a Pennsylvania
corporation, and Quality Gear & Machine, Inc. and certain real property from HTM Associates. Hy-Tech is primarily engaged in the manufacture and distribution of
pneumatic tools and parts for industrial applications.

Countrywide
conducts its business operations through Nationwide Industries, Inc. ("Nationwide"), Woodmark International, L.P. ("Woodmark"), a limited partnership between
Countrywide and WILP Holdings, Inc., a subsidiary of P&F, and Pacific Stair Products, Inc. ("Pacific Stair"). Nationwide is an importer and manufacturer of door, window and
fencing hardware. Woodmark is an importer of builders' hardware, including staircase components and kitchen and bath hardware and accessories. Pacific Stair manufactures premium stair rail products
and distributes Woodmark's staircase components to the building industry, primarily in southern California and the southwestern region of the United States.

The
Company's wholly-owned subsidiary, Embassy Industries, Inc. ("Embassy"), was engaged in the manufacture and sale of baseboard heating products and the importation and sale of
radiant heating systems until it exited that business in October 2005 through the sale of substantially all of its non-real estate assets. Embassy sold its real estate assets in June 2007.

The
Company's wholly-owned subsidiary, Green Manufacturing, Inc. ("Green"), was primarily engaged in the manufacture, development and sale of heavy-duty welded custom
designed hydraulic cylinders, a line of access equipment for the petro-chemical industry and a line of post hole digging equipment for the agricultural industry until it exited those businesses
between December 2004 and July 2005. Green has effectively ceased all operating activities.

The
assets and liabilities and results of operations of Embassy and Green have been segregated and reported separately as discontinued operations in the Consolidated Condensed Financial
Statements.

31

---



Basis of Financial Statement Presentation

The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States. Certain of these
accounting policies require the Company to make estimates and judgments that affect the reported amounts of assets, liabilities and the related disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates estimates, including those related to bad debts, inventory reserves, goodwill and intangible
assets. The Company bases its estimates on historical data and experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the combined
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the sale price is fixed or
determinable, and collectibility is reasonably assured. The Company sells its goods on terms which transfer title and risk of loss at a specified location, typically shipping point, port of loading or
port of discharge, depending on the final destination of the goods. Revenue recognition from product sales occurs when all factors are met, including transfer of title and risk of loss, which occurs
either upon shipment by the Company or upon receipt by customers at the location specified in the terms of sale. Other than standard product warranty provisions, the Company's sales arrangements
provide for no other, or insignificant, post-shipment obligations. The Company does offer rebates and other sales incentives, promotional allowances or discounts, from time to time and for
certain customers, typically related to customer purchase volume, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale. The Company
periodically evaluates whether an allowance for sales returns is necessary. Historically, the Company has experienced little, if any, sales returns. If the Company believes there are potential sales
returns, the Company would provide any necessary provision against sales.

Shipping and Handling Costs

The Company generally does not bill customers for shipping and handling costs. Expenses for shipping and handling costs are included in selling, general and
administrative expenses, and totaled approximately $2,785,000 and $2,723,000 for the years ended December 31, 2007 and 2006, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with maturities of three months or less from the date of
acquisition. There were no cash equivalents at December 31, 2007 and 2006. The Company maintains cash balances at various financial institutions. At December 31, 2007, these financial
institutions held approximately $2,376,000 in excess of amounts insured by the Federal Deposit Insurance Corporation and other government agencies.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, notes and other receivables, accounts payable
and short-term debt, approximate fair value as of December 31, 2007 and 2006 because of the relatively short-term maturity of these financial instruments. The carrying
amounts reported for long-term debt approximate fair value as of December 31, 2007 and 2006 because, in general, the interest rates underlying the instruments fluctuate with market
rates.

32

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Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are customer obligations due under normal trade terms. The Company sells its products to retailers, distributors and original equipment
manufacturers involved in a variety of industries, hardware, tools and mobile equipment. The Company performs continuing credit evaluations of its customers' financial condition, and although the
Company generally does not require collateral, letters of credit may be required from customers in certain circumstances.

Senior
management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. Analysis of customer history, financial data and the
overall economic environment is performed. In addition, balances outstanding for more than 90 days are evaluated for possible inclusion in the accounts receivable reserve. Collection agencies
may also be utilized if management so determines.

The
Company records an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. The Company also records as an additional allowance
a certain percentage of aged accounts receivable, based on historical experience and the Company's assessment of the general financial conditions affecting its customer base. If actual collection
experience changes, revisions to the allowance may be required. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated
change in the creditworthiness of any of these customers could have a material affect on the Company's results of operations in the period in which such changes or events occur. After all reasonable
attempts to collect an account receivable have failed, the amount of the receivable is written off against the allowance. Based on the information available, the Company believes that its allowance
for doubtful accounts as of December 31, 2007 was adequate. However, actual write-offs might exceed the recorded allowance.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of temporary cash investments, accounts receivable
and notes receivables. The Company places its cash in overnight money market instruments with high quality financial institutions, which, by policy, limit the amount of credit exposure in any one
financial instrument. The Company principally sells its products domestically to customers in diversified industries. (See Note 14).

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, possible disclosure of contingent assets and liabilities at the date of the financial instruments and the reported amounts of revenue and
expenses during the reporting period. On an on-going basis P&F evaluates its estimates, including those related to collectibility of account receivable, valuation of inventories,
recoverability of goodwill and intangible assets and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from
those estimates under different assumptions or conditions.

Reclassifications

Certain items from the prior year have been reclassified to conform to the current year presentation.

33

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Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method or the weighted average
method. The inventory balance which includes raw materials, labor and manufacturing overhead costs, is recorded net of an allowance for obsolete or unmarketable inventory. Such allowance is based upon
both historical experience and Management's understanding of market conditions and forecasts of future product demand. If the actual amount of obsolete or unmarketable inventory significantly exceeds
the estimated allowance, the Company's cost of sales, gross profit and net earnings would be significantly affected.

Property and Equipment and Depreciation and Amortization

Property and equipment are stated at cost less accumulated depreciation and amortization. The Company capitalizes items in excess of $1,000. Minor replacements
and maintenance and repair items are charged to expense as incurred. Upon disposal or retirement of assets, the cost and related accumulated depreciation are removed from the Company's consolidated
balance sheet.

Depreciation
of buildings and machinery and equipment is computed by using the straight-line method over the estimated useful lives of the assets. Buildings are depreciated
over periods ranging from 10 to 31.5 years, and machinery and equipment is depreciated over periods ranging from 3 to 12 years. Leasehold improvements are amortized over the life of the
lease or the useful life of the related asset, whichever is shorter.

Long-Lived Assets

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of any of these assets may not be
recoverable. In that regard, the Company will assess the recoverability of such assets based upon estimated undiscounted cash flow forecasts. If an asset impairment is identified, the asset is written
down to fair value based on discounted cash flow or another fair value measure.

Goodwill and Other Intangible Assets

Goodwill is carried at cost. Goodwill is not amortized but is subject to an annual test for impairment at the reporting unit level (operating segment or one level
below an operating segment) and between annual tests in certain circumstances. In accordance with Statement of Financial Accounting Standards No. 142,Goodwill and Other
Intangible Assets("SFAS 142"), we test goodwill for impairment on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment might
exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company's reporting units with the reporting
unit's carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the expected present
value of future cash flows and the market valuation approach. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the Company performs the second step of the goodwill
impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit's goodwill with the carrying
amount of that goodwill.

Intangible
assets other than goodwill are carried at cost less accumulated amortization. Intangible assets are generally amortized on a straight-line basis over the useful
lives of the respective assets, generally five to twenty-five years. Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted
future cash flows resulting from the use of the asset and its eventual

34

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disposition.
Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the amount the carrying
value exceeds the fair value of the asset.

In
July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 ("SFAS 141"). SFAS 141 replaced Accounting Principles Board Opinion 16 "Business
Combination" and requires the use of the purchase method for all business combinations initiated after June 30, 2001.

Warranty Liability

The Company offers its customers certain warranties against product defects for periods ranging from one to three years, depending on the specific product and
terms of the customer purchase agreement. However, certain products were sold in the past with lifetime warranties. The Company's typical warranties require it to repair or replace the defective
products during the warranty period at no cost
to the customer. At the time the product revenue is recognized, the Company records a liability for estimated costs under its warranties. The costs are estimated based on historical experience. The
Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts necessary. While the Company believes that its estimated liability for product warranties is
adequate and that the judgment applied is appropriate, the estimated liability for the product warranties could differ materially from future actual warranty costs.

Income Taxes

The Company files a consolidated Federal tax return. P&F Industries, Inc. and certain of its subsidiaries file a combined tax return
in New York State. All subsidiaries file other state and local tax returns on a stand-alone basis.

In
June 2006, the FASB issued Interpretation, or FIN, No. 48, "Accounting for Uncertainty in Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective for fiscal years beginning after December 15, 2006. The adoption of this statement
did not have a material effect on the Company's financial position or results of operations.

Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and any operating loss or tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of any change in the tax rate is recognized in
income in the period that includes the enactment date of such change. Income tax-related interest and penalties are recorded as a component of the provision for income taxes.

Advertising

The Company expenses its costs of advertising in the period in which they are incurred. Advertising costs for the years ended December 31, 2007 and 2006
were $2,048,000 and $1,844,000, respectively.

35

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(Loss) Earnings Per Common Share

Basic (loss) earnings per common share excludes any dilution. It is based upon the weighted average number of shares of common stock outstanding during the year.
Diluted (loss) earnings per common share reflects the effect of shares of common stock issuable upon the exercise of options, unless the effect on earnings is antidilutive.

Diluted
(loss) earnings per common share is computed using the treasury stock method. Under this method, the aggregate number of shares of common stock outstanding reflects the assumed
use of proceeds from the hypothetical exercise of any outstanding options or warrants to purchase shares of the Company's Class A Common Stock. The average market value for the period is used
as the assumed purchase price.

The
following table sets forth the computation of basic and diluted (loss) earnings per common share:

Year Ended December 31,2007

2006Numerator:Numerator for basic and diluted (loss) earnings per common share:(Loss) earnings from continuing operations

$
(17,223,000
)
$
3,811,000Discontinued operations, net of taxes


3,129,000


70,000Net (loss) earnings

$
(14,094,000
)
$
3,881,000Denominator:Denominator for basic (loss) earnings per shareweighted average common shares outstanding


3,613,000


3,579,000Effect of dilutive securities:Stock options





205,000Denominator for diluted (loss) earnings per shareadjusted Weighted average common shares and assumed conversions


3,613,000


3,784,000


At
December 31, 2007 and 2006, and during the years then ended, there were outstanding stock options whose exercise prices were higher than the average market values for the
respective periods. These options are anti-dilutive and were excluded from the computation of earnings per share during the year ended December 31, 2006. The weighted average
anti-dilutive options outstanding for the years ended December 31, 2007 and 2006 were 59,453 and 29,000, respectively. Diluted loss per share for the year ended December 31,
2007 was the same as basic loss per share as the inclusion of the effect of common share equivalents then outstanding would be anti-dilutive. At December 31, 2007 there were
approximately 162,000 options omitted from the calculations as they would have had an anti-dilutive effect.

Stock-Based Compensation

On January 1, 2006, the Company adopted the provisions of FASB issuance of SFAS No. 123(R), "Share-Based Payment" ("Statement 123(R)"), which
revises FASB SFAS No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), and supersedes APB Opinion 25, "Accounting for Stock Issued to Employees". Statement 123(R) requires the
Company to recognize expense related to the fair value of our stock-based compensation awards, including employee stock options.

36

---



As a result of adopting Statement 123(R), the Company's net (loss) earnings for the years ended December 31, 2007 and December 31, 2006 were approximately $352,000 and
$71,000 lower than if we had continued to account for stock-based compensation under APB Opinion 25. Compensation expense is recognized in the selling, general and administrative expenses line item of
the Company's statements of operations on a straight-line basis over the vesting periods. There are no capitalized stock-based compensation costs at December 31, 2007 and 2006.
There were no options granted during fiscal 2006.

We
estimated the fair value of the Company's common stock options using the following assumptions for the year ended December 31, 2007.

Risk-free interest rate


5.2
%Expected term (in years)


8.2Volatility


34.9
%Dividend yield


0
%Weighted-average fair value of options granted

$
5.68


The
fair values of the Company's common stock options were estimated on the date of the grant using the Black-Scholes pricing model with the following assumptions: (i) the
expected term was based on historical exercises and terminations; (ii) the expected volatility of our shares of common stock was determined using historical volatilities based on historical
stock prices over a period of time equal to the expected life of the options; (iii) the dividend yield is 0% as the Company has historically not declared dividends and does not expect to
declare any in the future and (iv) with respect to risk-free interest rate, the Company applies the ten year treasury bill interest rate as of the date of the grant.

The
expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. Because we consider our options to be "plain vanilla", we
estimated the expected term using a modified version of the simplified method of calculation, as prescribed by SAB No.107. This modified calculation uses the actual life for options that have been
settled, and a uniform distribution assumption for the options still outstanding. Under SAB 107, options are considered to be "plain vanilla" if they have the following characteristics: granted
"at-the-money"; exercisability is conditioned upon service through a vesting date; termination of service prior to vesting results in forfeiture; limited exercise period
following termination of service; and options are non-transferable and non-hedgeable.

Treasury Stock

Treasury stock is recorded at net acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in
capital with losses in excess of previously recorded gains charged directly to retained earnings.

Derivative Financial Instruments

The Company uses derivatives to reduce its exposure to fluctuations in foreign currencies, principally Japanese yen. Derivative products, specifically foreign
currency forward contracts, are used to hedge the foreign currency market exposures underlying certain debt and forecasted transactions with foreign vendors. The Company does not enter into such
contracts for speculative purposes.

For
derivative 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 a liability or an
identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedge item attributable to the hedged
risk are recognized in (loss) earnings in the current period. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure of variability in the
expected future cash flows that would be attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a

37

---



component
of accumulated comprehensive income (loss) (a component of shareholders' equity) and reclassified into (loss) earnings in the same period or periods during which the hedged transaction
affects (loss) earnings. The remaining gain or loss on the derivative instrument, if any (i.e., the ineffective portion and any portion of the derivative instrument excluded from the assessment
of effectiveness), is recognized in (loss) earnings in the current period. For derivative instruments not designated as hedging instruments, changes in the fair market values are recognized in (loss)
earnings as a component of cost of sales. At December 31, 2007 and 2006, all of the Company's derivative instruments are not designated as fair value hedging instruments.

The
Company accounts for changes in the fair value of its foreign currency contracts by marking them to market and recognizing any resulting gains or losses through its statements of
operations. The Company also marks its yen-denominated payables to market, recognizing any resulting gains or losses in its statements of operations. At December 31, 2007, the
Company had foreign currency forward contracts, maturing in 2007, to purchase Japanese yen at contracted forward rates. The value of these contracts at December 31, 2007, based on that day's
closing spot rate, was approximately $255,000, which was the approximate value of the Company's yen-denominated accounts payable. During the years ended December 31, 2007 and 2006
the Company recorded in its cost of sales net realized gains of approximately $18,000 and $39,000, respectively, on foreign currency transactions. At December 31, 2007 and 2006, the Company had
no material unrealized gains or losses on foreign currency transactions.

Adoption of New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid Financial
Instrumentsan amendment of Financial Accounting Standards ("SFAS") SFAS No. 133 and 140." SFAS No. 155 allows companies to elect to measure at fair value entire financial
instruments containing embedded derivatives that would otherwise have to be accounted for separately. It also requires companies to identify interests in securitized financial assets that are
freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest- and principal-only strips are subject to SFAS
No. 133, and amends SFAS No. 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets
are freestanding derivatives or contain embedded derivatives. SFAS No. 155 was effective for all financial instruments acquired, issued or subject to a re-measurement event after
the beginning of a company's first fiscal year that began after September 15, 2006. The adoption of this statement did not have a material effect on our financial position or results of
operations.

In
March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assetsan amendment of SFAS No. 140." SFAS No. 156 requires the
recognition of a servicing asset or liability each time a company undertakes an obligation to service a financial asset in certain situations. It requires all separately recognized servicing assets
and liabilities to be initially measured at fair value, if practical. SFAS No. 156 was effective as of the beginning of a company's first fiscal year that began after September 15, 2006.
The adoption of this statement did not have a material effect on our financial position or results of operations.

Effect of Newly Issued But Not Yet Effective Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 provides a new single authoritative
definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 will become effective as of

38

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January 1,
2008. The Company is currently evaluating the impact that the adoption of SFAS 157 may have on our financial position or results of operations.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115",
("SFAS 159"). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
SFAS 159 is effective as of the beginning of fiscal 2008. The Company is currently evaluating the impact that the adoption of SFAS 159 may have on our financial position or results of
operations.

In
December 2007, the FASB issued Statement 141 (revised 2007),Business Combinations(Statement 141R) to change how an entity accounts
for the acquisition of a business. When effective, Statement 141R will replace existing Statement 141 in its entirety. Statement 141R carries forward the existing requirements to account for all
business combinations using the acquisition method (formerly called the purchase method). In general, Statement 141R will require acquisition-date fair value measurement of identifiable
assets acquired, liabilities assumed, and non-controlling interests in the acquiree. Statement 141R will eliminate the current costbased purchase method under Statement 141.
The new measurement requirements will result in the recognition of the full amount of acquisition-date goodwill, which includes amounts attributable to non-controlling
interests. The acquirer will recognize in income any gain or loss on the re-measurement to acquisition-date fair value of consideration transferred or of previously acquired
equity interests in the acquiree. Neither the direct costs incurred to effect a business combination nor the costs the acquirer expects to incur under a plan to restructure an acquired business will
be included as part of the business combination accounting. As a result, those
costs will be charged to expense when incurred, except for debt or equity issuance costs, which will be accounted for in accordance with other generally accepted accounting principles. Statement 141R
will also change the accounting for contingent consideration, in process research and development, contingencies, and restructuring costs. In addition, changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination that occur after the measurement period will impact income taxes under Statement 141R. Statement 141R is effective for fiscal
years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The Company intends to adopt Statement 141R effective
January 1, 2009 and apply its provisions prospectively. The Company is evaluating the impact that the adoption of Statement 141R will have on its financial statements.

In
December 2007, the SEC staff issued Staff Accounting Bulletin (SAB) 110,Share-Based Payment, which amends SAB 107, Share-Based Payment, to
permit public companies, under certain circumstances, to use the simplified method in SAB 107 for employee option grants
after December 31, 2007. Use of the simplified method after December 2007 is permitted only for companies whose historical data about their employees' exercise behavior does not provide a
reasonable basis for estimating the expected term of the options. The Company currently uses the simplified method to estimate the expected term for employee option grants as adequate historical
experience is not available to provide a reasonable estimate. SAB 110 is effective for employee options granted after December 31, 2007. The Company intends to adopt SAB 110
effective January 1, 2008 and continue applying the simplified method until enough historical experience is readily available to provide a reasonable estimate of the expected term for employee
option grants.

In
December 2007, the FASB issued Statement 160,Non-controlling Interests in Consolidated Financial Statements: an amendment of ARB
No. 51. The new Statement changes the accounting for, and the financial statement presentation of, non-controlling equity interests in a consolidated
subsidiary. Statement 160 replaces the existing minority-interest provisions of Accounting Research Bulletin (ARB) 51,Consolidated Financial
Statements, by defining a new termnon-controlling intereststo replace what were previously
calledminority interests. The new standard establishesnon-controlling interestsas a
component of the equity of a consolidated entity. The underlying principle

39

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of
the new standard is that both the controlling interest and the non-controlling interests are part of the equity of a single economic entity: the consolidated reporting entity.
Classifying non-controlling interests as a component of consolidated equity is a change from the current practice of treating minority interests as a mezzanine item between liabilities and
equity or as a liability. The change affects both the accounting and financial reporting for non-controlling interests in a consolidated subsidiary. Statement 160 includes reporting
requirements intended to clearly identify and differentiate the interests of the parent and the interests of the non-controlling owners. The reporting requirements are required to be
applied retrospectively. Statement 160 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The
Company intends to adopt Statement 160 effective January 1, 2009 and apply its provisions prospectively. The Company will also present comparative financial statements that reflect the
retrospective application of the disclosure and presentation provisions when it applies the requirements of Statement 160. The Company is evaluating the impact that the adoption of Statement 160 will
have on its financial statements.

NOTE 2ACQUISITIONS

Hy-Tech
Machine, Inc.

On
February 14, 2007, pursuant to an Asset Purchase Agreement (the "Hy-Tech APA") effective as of February 12, 2007, Hy-Tech, a Delaware corporation
and a wholly-owned subsidiary of Continental, acquired substantially all of the assets (the "Hy-Tech Purchased Property") of Hy-Tech Machine, Inc., a Pennsylvania
corporation, and Quality Gear & Machine, Inc., a Pennsylvania corporation (collectively, the "Hy-Tech Sellers"). The purchase price consisted of $16,900,000 in cash, subject
to adjustments, plus the assumption of certain payables and liabilities and the obligation to make certain contingent payments based on factors described in the Hy-Tech APA. The purchase
price was negotiated on the basis of the Hy-Tech Sellers' historical financial performance. The Hy-Tech Purchased Property was used by the Hy-Tech Sellers in the
business of, among other things, manufacturing and selling pneumatic tools and other tool products.

In
connection with this acquisition, Hy-Tech contemporaneously entered into an Agreement of Sale with HTM Associates, a Pennsylvania general partnership comprised of certain
shareholders of the Hy-Tech Sellers ("HTM"), pursuant to which Hy-Tech purchased certain real property located in Cranberry Township, Pennsylvania from HTM for $2,200,000 in
cash. The acquisition of the Hy-Tech Purchased Property and the real property was financed through the Company's senior credit facility.

The
Company also agreed to make additional payments ("Contingent Consideration") to the Sellers. The amount of Contingent Consideration is to be based on a percentage of the average
increase in earnings before interest, taxes, depreciation and amortization ("EBITDA") over a two-year period from the date of acquisition, over a base year EBITDA of $4,473,000. In
addition, the Company has agreed to make a further additional payment ("Additional Contingent Consideration"), subject to certain conditions related to an exclusive supply agreement with a major
customer and, to a certain extent and subject to certain provisions, the achievement of Contingent Consideration. This Additional Contingent Consideration may not exceed $1,900,000. Any such
additional payments for Contingent Consideration or Additional Contingent Consideration, if any, would be payable on or about ninety days subsequent to the second anniversary of the acquisition date
and will be treated by the Company as additions to goodwill.

Contemporaneously
with this acquisition, the Company executed and delivered Amendment No. 7 to Credit Agreement with the two banks. The amendment, among other things, added
Continental and Hy-Tech as additional co-borrowers and provides for new term loans in amounts not to exceed $19,000,000. The principal on the new term loan notes are payable in
25 consecutive quarterly installments of 1/25 of the aggregate principal amount outstanding on January 31, 2008, commencing on

40

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January 31,
2008. From the date of the amendment through January 31, 2008, monthly payments of interest only were required and were remitted to the bank. The Company and the
co-borrowers have the option to pay interest at a rate based on either the fluctuating prime rate, LIBOR or a combination of the two rates. The new term loan notes shall mature on
January 31, 2014. The amendment also provided for the amendment and restatement of certain existing term loan notes. The revolving credit loan facility provides for a maximum of $18,000,000,
with various sublimits, for direct borrowings, letters of credit, bankers' acceptances and equipment loans.

The
purchase price for this acquisition was as follows:

Cash paid at closing from new borrowings

$
19,100,000Direct acquisition costs


912,000Total purchase price prior to net asset adjustment


20,012,000Net asset adjustment


753,000Total purchase price

$
20,765,000


The
following table presents the estimated fair values of the net assets acquired and the amount allocated to goodwill:

Accounts receivable, net




$
3,141,000Inventories, net





6,797,000Other current assets





54,000Other assets





95,000Property and equipment





7,313,000Identifiable intangible assets:Backlog

$
94,000Customer relationships


3,076,000Trademark


199,000Engineering drawings


290,000


3,659,00021,059,000Less: liabilities assumed


1,045,000Deferred tax


165,000


1,210,000Total fair value of net assets acquired





19,849,000Goodwill





916,000Total estimated purchase price




$
20,765,000


The
Company obtained a final valuation of the identifiable intangible assets through an independent third-party. The excess of the total purchase price over the fair value of the net
assets acquired, including the value of the identifiable intangible assets, has been allocated to goodwill. Goodwill will be amortized, for fifteen years, for tax purposes but not for financial
reporting purposes. The fair values and estimated lives of the identifiable intangible assets are based on current information and are subject to change. The intangible assets subject to amortization
will be amortized over fifteen years for tax purposes. For financial reporting purposes, useful lives have been assigned as follows:

Backlog

6 monthsCustomer relationships

6-13 yearsTrademark

IndefiniteEngineering drawings

20 years


41

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The
following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company and Hy-Tech as though the acquisition transaction had
occurred as of January 1, 2006. The pro forma amounts give effect to appropriate adjustments for amortization of intangible assets, interest expense and income taxes. The pro forma amounts
presented are not necessarily indicative of either the actual consolidated operating results had the acquisition transaction occurred as of January 1, 2006 or of future consolidated operating
results.

Year Ending December 31,2007

2006Net revenue

$
113,004,000

$
129,607,000Net (loss) earnings

$
(13,911,000
)
$
4,594,000(Loss) earnings per share of common stockBasic

$
(3.85
)
$
1.28Diluted

$
(3.85
)
$
1.21


Pacific
Stair Products, Inc.

Pursuant
to an Asset Purchase Agreement (the "PSP APA"), dated December 20, 2005, between Pacific Stair Products, a California corporation ("Old PSP"), and Pacific Stair
Products, Inc., a then newly-formed Delaware corporation ("Pacific Stair") and a 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, subject to adjustments, plus the assumption of certain liabilities and obligations by
Pacific Stair. The assets purchased pursuant to the PSP APA include, among others, accounts receivable, inventory, machinery and equipment and certain intangibles. Certain assets were retained by Old
PSP including cash and title to any real property. Pacific Stair is a manufacturer of premium stair rail products and a distributor of staircase components to the building industry, primarily in
southern California and the southwestern region of the United States. As a result of this transaction, Countrywide has increased its purchasing power and geographic distribution. The acquisition was
financed through the Company's credit facility with Citibank. The consolidated financial statements presented herein include the results of operations for Pacific Stair from the date of acquisition.

The
purchase price for this acquisition, negotiated on the basis of Pacific Stair's historical financial performance, was as follows:

Cash paid at closing from short-term borrowings

$
5,233,000Purchase price reduction for working capital adjustment


(38,000
)Direct acquisition costs


214,000Total purchase price

$
5,409,000


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The
following table presents the estimated fair values of the net assets acquired and the amount allocated to goodwill:

Accounts Receivable




$
576,000Inventories





335,000Property and equipment





250,000Identifiable intangible assets:Customer relationships

$
1,800,000Trade-name


1,450,000Non-compete and employment agreements


50,000


3,300,0004,461,000Less: liabilities assumed





2,000Total fair value of net assets acquired





4,459,000Goodwill





950,000Total purchase price




$
5,409,000


The
Company obtained an independent third-party valuation of the identifiable intangible assets. The excess of the total purchase price over the fair value of the net assets acquired,
including the value of the identifiable intangible assets, had been allocated to goodwill. Goodwill will be amortized, for fifteen years, for tax purposes but not for financial reporting purposes. The
fair values of the identifiable intangible assets were based on then current information and are subject to change. The intangible assets subject to amortization will be amortized over fifteen years
for tax purposes. For financial reporting purposes, useful lives had been assigned as follows:

Customer relationships

25 yearsTrade-name

IndefiniteNon-compete and employment agreements

5 years


During
2006, the Company recorded goodwill of approximately $950,000 related to the acquisition of certain assets of Pacific Stair and recorded net additions to goodwill of approximately
$150,000 related to earn out payments pursuant to the terms of the asset purchase agreement.

NOTE 3DISCONTINUED OPERATIONS

Embassy
Industries, Inc.

Pursuant
to an Asset Purchase 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 of its operating assets to EMI. Certain assets were retained by Embassy, including, but not
limited to, cash and title to any real property owned by Embassy at the consummation of the sale to EMI. Embassy has effectively ceased all operating activities.

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
to terminate that certain contract entered into by Embassy and Purchaser on January 13, 2006 (the "Agreement", and as amended, the "Contract of Sale"). Pursuant to the Contract of Sale, Embassy
agreed to sell its Farmingdale, New York premises (the "Farmingdale Premises") to Purchaser for a purchase price of $6,403,000.

The
Purchaser Letter purports to terminate the Contract of Sale based upon Purchaser's assertion that Embassy had not satisfied certain requirements and demands that the escrow agent
return the

43

---



down-payment
with accrued interest, and that Purchaser be reimbursed for the costs of survey and title examination.

Embassy
informed Purchaser that its purported termination of the Contract of Sale was in default of its obligation to consummate the purchase of the Farmingdale Premises under the terms
of the Contract of Sale. On August 2, 2006, Purchaser instituted an action against Embassy in the Supreme Court of the State of New York, County of Suffolk, for breach of contract and return of
down-payment, seeking $650,000, together with costs of title and survey and interest thereon, and the cost of the action. The down-payment remains in escrow pending resolution
of this matter. Embassy believes the action is without merit and intends to vigorously defend it.

In
June 2007, Embassy received approximately $6,300,000 from the sale of the real property it owned, used the after-tax proceeds from the sale to satisfy the mortgage on the
building of approximately $1,200,000 and to reduce its long-term debt. The Company recorded a pre-tax gain from the sale of approximately $5,100,000.

Green

Green
was primarily engaged in the manufacture, development and sale of heavy-duty welded custom designed hydraulic cylinders sold for use as integrated components on a
variety of equipment and machinery manufactured by others. Green also manufactured a line of access equipment for the petro-chemical and bulk storage industries. This product line consisted of
bridges, platforms, walkways and stairways, constructed of steel or aluminum and generally installed outdoors. In addition, Green marketed a small line of diggers used primarily as attachments to
small tractors for light farm work. This product line was marketed through farm equipment dealers and wholesalers. We sold the principal assets of Green between December 2004 and July 2005 in three
transactions pursuant to three separate asset purchase agreements with non-affiliated third parties. During 2007 and 2006, Green received commission income from one of the
non-affiliated third parties. These amounts are included in the earnings from discontinued operations.

44

---



The
following amounts related to Embassy and Green have been segregated from the Company's continuing operations and are reported as assets held for sale and assets and liabilities of
discontinued operations in the consolidated balance sheets:

December 31,2007

2006Asset held for sale and assets of discontinued operations:Current:Prepaid expenses

$
56,000

$
350,000Asset held for sale





577,000Sub-total


56,000


927,000Long-term:Other receivable


9,000


40,000Total assets held for sale and assets of discontinued operations

$
65,000

$
967,000Liabilities of discontinued operations:Current:Accounts payable and accrued expenses

$
30,000

$
190,000Mortgage payable





1,254,000Sub-total


30,000


1,444,000Long-term:Pension Obligation


342,000


353,000Total liabilities of discontinued operations

$
372,000

$
1,797,000


Results
of operations for Embassy and Green and have been segregated from continuing operations and reflected as discontinued operations approximately as follows:

Year Ended December 31,2007

2006Earnings from operation of discontinued operations, before taxes

$
119,000

$
17,000Income tax (expense) benefit


(27,000
)

53,000Earnings from operation of discontinued operations


92,000


70,000Gain on sale of assets held for sale, before taxes


5,095,000


Income tax (expense)


(2,058,000
)

Gain on sale of assets held for sale


3,037,000


Earnings from discontinued operations

$
3,129,000

$
70,000


45

---



NOTE 4ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivablenet consists of:

December 31,2007

2006Trade accounts receivable

$
13,502,000

$
12,908,000Allowance for doubtful accounts


619,000


223,000$
12,883,000

$
12,685,000


NOTE 5INVENTORIES

Inventoriesnet consist of:

December 31,2007

2006Raw material

$
2,525,000

$
2,537,000Work in process


2,156,000


334,000Finished goods


30,620,000


25,651,00035,301,000


28,522,000Reserve for obsolete and slow-moving inventories


(3,565,000
)

(1,829,000
)$
31,736,000

$
26,693,000


NOTE 6GOODWILL AND OTHER INTANGIBLE ASSETS

We performed our annual impairment test of goodwill during the fourth quarter based on conditions as of November 30, 2007, in accordance with
SFAS 142, and determined that goodwill at Florida Pneumatic and the operating units within the Countrywide segment were impaired necessitating a charge of approximately $21,243,000. Further, as
a result of this impairment analysis it was determined that the carrying value of the vendor relationships in other intangible assets was fully impaired. As such we wrote off the balance of
approximately $2,219,000. We believe the intangible assets that were impaired are essentially the result of the significant reduction in new home construction during the year, which is a critical
component to our business along with the general economic down-turn in the geographical sectors in which we market our products.

During
2006 and 2005, according to the U.S. Department of Commerce Census data, new single-unit housing starts were 1,655,000 and 1,636,000, respectively. However, during
2007, according to the same source, new single-unit housing starts had decreased to 1,218,000. The fall-off of single unit housing starts from 2006 to 2007 was 437,000, or
26.4%. Additionally, during 2007 gross margin percentage at Florida Pneumatic slipped to 26.0%, a decrease of 3.4% points from 29.4% for the year ended December 31, 2006, resulting in a
decrease in gross profit of approximately $1,600,000. This was principally the result of price concessions to a major
retail customer and decreased shipments to another retailer. Additionally, during 2007 Florida Pneumatic sold more promotional items than in the prior year. Promotional items generally are sold at
lower gross margins, contributing to the lower gross margin for 2007. All of these factors highlight the key elements driving the decrease in value of goodwill.

46

---



The
changes in the carrying amounts of goodwill are as follows:

Consolidated

Tools and
other products

Hardware and
accessoriesBalance, January 1, 2006

$
23,821,000

$
2,394,000

$
21,427,000Goodwill acquired during the year


1,100,000





1,100,000Balance, December 31, 2006


24,921,000


2,394,000


22,527,000Goodwill acquired during the year


916,000


916,000


Goodwill impairment during the year


(21,243,000
)

(2,394,000
)

(18,849,000
)Balance, December 31, 2007

$
4,594,000

$
916,000

$
3,678,000


The
changes in other intangible assets were as follows:

December 31, 2007

December 31, 2006Cost

Accumulated
amortization

Cost

Accumulated
amortizationOther intangible assets:Customer relationships

$
14,130,000

$
4,117,000

$
10,960,000

$
3,055,000Vendor relationship








890,000


223,000Non-compete and Employment agreements


810,000


780,000


810,000


719,000Trademark


699,000





2,140,000


Drawings


290,000


12,000Licensing


105,000


21,000


105,000


11,000Total

$
16,034,000

$
4,930,000

$
14,905,000

$
4,008,000


The
table above reflects impairment charges aggregating approximately $2,219,000 recorded in the Hardware segment. Woodmark and Pacific Stair both reported decreases in revenue
during 2007, primarily the result of the significant downturn in housing starts, which is a key factor for both subsidiaries, as well as the loss of a key customer. There were no impairment charges
recorded in the Tools segment.

Amortization
expense for intangible assets subject to amortization was approximately $1,234,000 and $1,198,000 for the years ended December 31, 2007 and 2006, respectively.
Amortization expense for each of the next five years is estimated to be as follows 2008$916,000; 2009$917,000; 2010$916,000; 2011$907,000; and
2012$906,000. The weighted average amortization period for intangible assets was 13.1 years and 14.1 years at December 31, 2007 and 2006, respectively.

NOTE 7SHORT-TERM BORROWINGS

The Company entered into a credit agreement, as amended (the "credit agreement"), with two banks in 2004. This agreement includes a revolving credit loan
facility, which provides a total of $18,000,000 for direct borrowings, with various sublimits for letters of credit, bankers' acceptances and equipment loans. There are no commitment fees for any
unused portion of this credit facility. The credit agreement expires in June 2008 and is subject to annual review by the lending banks. Direct borrowings under the revolving credit loan facility are
secured by the Company's accounts receivable, inventory and equipment and are cross-guaranteed by each of the Company's subsidiaries. These borrowings bear interest at either LIBOR plus the currently
applicable loan margin or the prime interest rate. At December 31, 2007 and 2006, the applicable loan margins added to LIBOR were 1.75% and 1.45%, respectively. The weighted average interest
rate on short-term borrowings for the years ended December 31, 2007 and 2006 were 7.42% and 7.11%, respectively. At December 31, 2007

47

---



and
2006, the balances outstanding on the revolving credit loan facility were $8,000,000 and $3,000,000, respectively.

The
credit agreement also includes a foreign exchange line, which provides for the availability of up to $10,000,000 in foreign currency forward contracts. These contracts fix the
exchange rate on future purchases of foreign currencies needed for payments to foreign suppliers. The total amount of foreign
currency forward contracts outstanding under the foreign exchange line at December 31, 2007, based on that day's closing spot rate, was approximately $252,000.

Under
the terms of the credit agreement, the Company is required to adhere to certain financial covenants. At December 31, 2007, the Company was not in compliance with one of the
financial covenants. Subsequent to December 31, 2007, the banks waived compliance with such financial covenant.

The
Company anticipates that it may not be in compliance with a financial covenant during 2008. However, based upon discussions with the banks, the Company is confident that the banks
will waive the Company's non-compliance of this financial covenant at March 31, 2008 and amend the credit agreement. We believe that such amendment to the credit agreement will enable us to be
in compliance with this covenant in future periods. Accordingly the Company has not reclassified to current liabilities the long-term portions of its bank debts. However, there can be no
assurances that the Company will be able to secure such amendment.

NOTE 8WARRANTY LIABILITY

Changes in the Company's warranty liability, included in other accrued liabilities were as follows:

Year Ended December 31,2007

2006Balance, beginning of year

$
368,000

$
419,000Warranties issued and changes in estimated pre-existing warranties


1,034,000


473,000Actual warranty costs incurred


(850,000
)

(524,000
)Balance, end of year

$
552,000

$
368,000


NOTE 9LONG-TERM DEBT

The Company's credit agreement also included a term loan facility, which provided 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. Borrowings under the term loan are secured by the Company's accounts receivable, inventory
and equipment and are cross-guaranteed by each of the Company's subsidiaries. These borrowings bear interest at either LIBOR plus the currently applicable loan margin or the prime interest rate. At
December 31, 2007 and 2006, the applicable loan margins added to LIBOR were 2.00% and 1.50%, respectively. The Company borrowed $29,000,000 against this facility to finance the Woodmark
acquisition transaction, and there was $9,800,000 and $13,600,000 outstanding against the term loan facility at December 31, 2007 and 2006, respectively.

In
connection with the acquisition of Hy-Tech in February 2007, the Company executed and delivered Amendment No. 7 to Credit Agreement with the two banks. The
amendment, among other things, added Continental and Hy-Tech as additional co-borrowers and provides for new term loans in amounts not to exceed $19,000,000. The Company paid
down $5,000,000 through increasing its short-term borrowings, which effectively reduced the term loan attributable to the acquisition of Hy-Tech to $14,000,000 as at
December 31, 2007. The principal on the new term loans are payable in

48

---



25
consecutive quarterly installments of 1/25 of the aggregate principal amount outstanding on January 31, 2008, commencing on January 31, 2008. From the date of the
amendment through January 31, 2008, monthly payments shall be made of interest only. The Company and the co-borrowers have the option to pay interest at a rate based on either the
fluctuating prime rate, LIBOR or a combination of the two rates. The new term loan notes shall mature on January 31, 2014.

Long-term
debt consists of:

|                                                                                                                                                                                                                                                                             |  | December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|
|Term loan$950,000 (plus interest at LIBOR plus the applicable loan margin) payable quarterly through June 2010, and the balance of $300,000 payable in September 2010                                                                                                       |  | $           
|Term loan$560,000 (plus interest at LIBOR plus the applicable loan margin) payable quarterly commencing January 31, 2008 through January 31, 2014.                                                                                                                          |  |             
|Note payable to former owners of Woodmarklump sum payment, plus interest payable monthly, due in June 2007. At December 31, 2006, the applicable rate was LIBOR plus 1.5%                                                                                                   |  |             
|Note payable to former owners of Woodmarklump sum payment due in June 2007. This non-interest bearing note was discounted at inception using the Company's borrowing rate of 3.04%. Amount includes $95,833 of imputed
interest expense recorded through December 31, 2006. |  |             
|Mortgage loan$11,244 (plus interest at LIBOR plus 155 basis points) payable monthly through May 2009, when a final payment of approximately $1,090,000 is due(a)                                                                                                            |  |             
|Mortgage loan$16,388 (including interest at 7.09%) payable monthly through March 2014(a)                                                                                                                                                                                    |  |             
|                                                                                                                                                                                                                                                                             |  |             
|                                                                                                                                                                                                                                                                             |  |             
|Less current maturities                                                                                                                                                                                                                                                      |  |             
|                                                                                                                                                                                                                                                                             |  |             
|                                                                                                                                                                                                                                                                             |  | $           
|                                                                                                                                                                                                                                                                             |  |             

---

The
aggregate amounts of the long-term debt scheduled to mature in each of the years ended December 31 are approximately as follows: 2008$6,305,000;
2009$7,318,000; 2010$4,591,000; 2011$2,402,000; 2012$2,414,000; 2013$2,427,000 and thereafter$593,000. Interest expense on
long-term debt was approximately $2,107,000 and $1,430,000 for the years ended December 31, 2007 and 2006, respectively. The balance of Embassy's mortgage loan, which was
approximately $1,254,000 at December 31, 2006 and was included in "Liabilities of Discontinued Operations" on the consolidated balance sheet (see Note 3), was paid in full in July 2007.

For
the years ended December 31, 2007 and 2006, the Company recorded interest expense of $2,918,000 and $1,973,000, respectively, net of interest income of approximately $16,000
and $32,000, respectively.

NOTE 10CAPITAL STOCK TRANSACTIONS

During the year ended December 31, 2007 the Company did not repurchase any of its Class A common shares. However, during the year ended
December 31, 2006, the Company purchased 23,031

49

---



shares
of its Class A Common Stock, at a cost of $294,196 in connection with a program to repurchase shares. In September 2006, the Company's Board of Directors authorized the purchase of an
additional 37,450 shares up to a share repurchase maximum of 150,000 shares and extended the time during which the Company may repurchase such shares by an additional year to September 30,
2007. In September 2007, the Company's Board of Directors extended this program by an additional year to September 30, 2008.

During
2007 and 2006, the Company received 46,362 and 5,000 shares, respectively, of Class A Common Stock in connection with the exercise of options to purchase 96,664 shares and
15,000 shares, respectively, of Class A Common Stock. The value of these shares was recorded at $522,611 and $61,850, respectively.

In
connection with its Stockholder Rights Plan, the Company entered into a Rights Agreement (as amended) and distributed as a dividend to each holder of Class A Common Stock a
preferred stock purchase right. These rights entitle the stockholders, in certain circumstances, to purchase one one-thousandth of a share of the Company's Series A Junior
Participating Preferred Stock for $10. The Stockholder Rights Plan, which expires in August 2014, is intended to protect, among other things, the interests of the Company's stockholders in the event
the Company is confronted with coercive or unfair takeover tactics.

NOTE 11STOCK OPTIONS

The Company's 2002 Incentive Stock Option Plan (the "Current Plan") authorizes the issuance, to employees and directors, of options to purchase a maximum of
1,100,000 shares of Class A Common Stock. These options must be issued within ten years of the effective date of the Plan and are exercisable for a ten year period from the date of grant, at
prices not less than 100% of the market value of the Class A Common 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, at prices not less than 110% of the market value of the Class A Common Stock on the date the option is granted. Options typically vest immediately. In the event options
granted contain a vesting schedule over a period of years, the Company recognizes compensation cost for these awards on a straight-line basis over the service period. The Current Plan,
which terminates in 2012, is the successor to the Company's 1992 Incentive Stock Option Plan (the "Prior Plan").

In
June 2007 the Company granted 92,500 options to purchase the Company's Class A common shares, 49,500 which were to officers and members of the board of directors of the
Company. Of the options granted to the officers and members of the board of directors, 49,000 have an exercise price of $11.20 and 500 have an exercise price of $11.38. The options granted to the
officers and members of the board of directors vest as to one third on each of the anniversary dates in 2008, 2009 and 2010. The remaining 43,000 options granted have an exercise price of $11.20 and
were fully vested as of the date of the grant. All options granted in June 2007 have a ten year life.

50

---



The
following table contains information on the status of our stock options:

Number of
Shares

Weighted Average
Exercise Price
per share

Aggregate
Intrinsic
ValueOutstanding, January 1, 2006

596,900

$
7.58Exercised

(36,000
)

5.79Outstanding, December 31, 2006

560,900


7.69Granted

92,500


11.20Exercised

(106,064
)

6.08Expired

(13,900
)

9.41Outstanding, December 31, 2007

533,436

$
8.58

$
Vested, December 31, 2007

461,609

$
8.27

$



The
following is a summary of changes in non-vested shares:

December 31,2007

2006Option
Shares

Weighted
Average
Grant-Date
Fair Value

Option
Shares

Weighted
Average
Grant-Date
Fair ValueNon-vested shares, beginning of year

49,488

$
3.77

72,149

$
4.05Granted

45,000


6.52




Vested

(22,661
)

4.68

(22,661
)

4.68Forfeited






Non-vested shares, end of year

71,827

$
5.20

49,488

$
3.77


The
Company recognizes compensation cost over the requisite service period. However, the exercisability of the respective non-vested options, which are at
pre-determined dates on a calendar year, do not necessarily correspond to the period(s) in which straight-line amortization of compensation cost is recorded.

Other Information

As
of December 31, 2007, the Company had approximately $203,000 of total unrecognized compensation cost related to non-vested awards granted under our share-based
plans, which we expect to recognize over a weighted-average period of 1.4 years.

The
Company received cash from options exercised during the years ended December 31, 2007 and 2006 of approximately $122,000 and $147,000, respectively. The impact of these cash
receipts is included in financing activities in the accompanying consolidated statements of cash flows. Statement 123(R) requires that cash flows from tax benefits attributable to tax deductions in
excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows.

There
were options available for issuance under the Current Plan as of December 31 of each year as follows: 2007590,900 and 2006683,400. Of the options
outstanding at December 31, 2007, 366,936 were issued under the Current Plan and 166,500 were issued under the Prior Plan.

51

---



The
following table summarizes information about stock options outstanding and exercisable at December 31, 2007:

|              |  | Options outstanding |  |     |  |   |       | 
|------------- |  | ------------------- |  | --- |  | - | ----- | 
|
|
|
|$6.00         |  | 109,436             |  | 4.5 |  | $ | 6.00  | 
|$7.88         |  | 152,500             |  | 0.2 |  |   | 7.88  | 
|$7.90$8.06   |  | 115,688             |  | 6.5 |  |   | 8.05  | 
|$8.75         |  | 2,000               |  | 2.3 |  |   | 8.75  | 
|$8.87         |  | 24,812              |  | 1.3 |  |   | 8.87  | 
|$8.94         |  | 12,000              |  | 1.2 |  |   | 8.94  | 
|$14.44$16.68 |  | 24,500              |  | 7.5 |  |   | 16.50 | 
|$11.20$11.38 |  | 92,500              |  | 9.5 |  |   | 11.20 | 
|              |  |                     |  |     |  |   |       | 
|$6.00$16.68  |  | 533,436             |  | 4.5 |  | $ | 8.58  | 
|              |  |                     |  |     |  |   |       | 

NOTE 12INCOME TAXES

Income tax (benefit) expense on continuing operations in the consolidated statements of operations consists of:

Year Ended December 31,2007

2006Current:Federal

$
1,030,000

$
1,624,000State and local


(224,000
)

693,000Total current


806,000


2,317,000Deferred:Federal


(4,851,000
)

333,000State and local


(370,000
)

18,000Total deferred


(5,221,000
)

351,000Total

$
(4,415,000
)
$
2,668,000


52

---



Deferred
tax assets (liabilities) consist of:

December 31,2007

2006Deferred tax assetscurrent:Bad debt reserves

$
229,000

$
82,000Inventory reserves


661,000


901,000Warranty and other reserves


788,000


320,0001,678,000


1,303,000Valuation allowance


(24,000
)

1,654,000


1,303,000Deferred tax liabilitiescurrent:Prepaid expenses


(257,000
)

(323,000
)Net deferred tax assetscurrent

$
1,397,000

$
980,000Deferred tax assetsnon-currentIntangibles

$
457,000

$
Goodwill


3,373,000


State Net operating loss


51,000Other


68,000


3,949,000


Valuation allowance


(153,000
)

3,796,000


Deferred tax liabilitiesnon-current:Depreciation


(351,000
)

(208,000
)Intangible assets





(135,000
)Goodwill





(791,000
)(351,000
)

(1,134,000
)Net deferred tax assets (liabilities)non-current

$
3,445,000

$
(1,134,000
)


Under
FAS 109, the Company recorded a full valuation allowance for the state tax benefit related to deferred tax assets, including a state net operating loss carry forward of
approximately $500,000 which expires in 2017. The Company believes it is more likely than not that the remaining tax benefits associated with these net deferred tax assets will be realized in the
foreseeable future based upon its ability to generate sufficient income.

53

---



A reconciliation of the Federal statutory rate to the total effective tax rate applicable to (loss) earnings from continuing operations before income taxes is as follows:

Year ending December 31,2007

2006$

%

$

%Federal income taxes computed at statutory rates

$
(7,357,000
)
(34.0
)
$
2,203,000

34.0(Decrease) increase in taxes resulting from:State and local taxes, net of Federal tax benefit


(250,000
)
(1.1
)

469,000

7.2Increase in valuation allowance


177,000

0.8




Expenses not deductible for tax purposes


73,000

0.3


74,000

1.2Goodwill impairment


3,272,000

15.1




Tax audit settlements


(319,000
)
(1.5
)



Other


(11,000
)



(78,000
)
(1.2
)Income tax (benefit) expense

$
(4,415,000
)
(20.4
)
$
2,668,000

41.2


The
Company adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect of adopting FIN 48 did not have a material impact on the Company's financial
position or results of operations. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at January 1, 2007

$
369,000Additions for tax positions related to prior years


25,000Lapse of statute of limitations


(79,000
)Settlements with taxing authorities


(264,000
)Balance at December 31, 2007

$
51,000


The
FIN 48 liability at December 31, 2007 can be completely reduced within the next ten months with the lapse of the statute of limitations. The amount, if recognized,
would favorably affect the Company's effective tax rate.

Interest
and penalties related to income tax liabilities are included in income tax expense. During the year ended December 31, 2007, the Company recognized a net reduction of
approximately $138,000. The Company has approximately $27,000 for the payment of interest accrued at December 31, 2007 and had approximately $165,000 accrued on January 1, 2007 upon
adoption of FIN 48.

In
2007, the Internal Revenue Service completed its examination of the Company's Federal tax returns for the years 2003 and 2004 and issued a Revenue Agent's Report that reported no
change to the returns as filed. All examinations of tax years prior to 2003 have been completed.

In
addition, the Company and certain of its subsidiaries file tax returns in the states of New York and Florida. During 2007, both New York and Florida completed examinations of tax
returns ranging from 2001 through 2005. The completion of the audits resulted in a reduction of approximately $264,000 in tax liabilities related to uncertain tax positions. All examinations of tax
year prior to 2001 have been completed.

In
June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force in Issue No. 06-3 ("EITF 06-3"), "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is Gross versus Net Presentation)."

54

---



The
scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on revenueproducing activity between a seller and a customer and
may include, but is not limited to, sales use, value added, and some excise taxes. EITF 06-3 also concluded that the presentation of taxes within its scope on either a gross
(included in revenue and costs) or net (excluded from revenue) basis is an accounting policy decision subject to appropriate disclosure. EITF 06-3 is effective for periods beginning
after December 15, 2006. The Company currently presents these taxes on a net basis and has elected not to change its presentation method.

NOTE 13COMMITMENTS AND CONTINGENCIES

(a)   P&F
and certain of its subsidiaries have adopted a defined contribution pension plan, which covers substantially all non-union employees. Contributions to
this plan were determined as a percentage of compensation. The amounts recognized as pension expense for this plan were approximately $504,000 and $400,000, for the years ended December 31,
2007 and 2006, respectively.

The
Company maintains a defined contribution 401(k) plan, which covers all of their respective employees. Certain of the Company's subsidiaries provide for employer contributions to the
plan, which are determined as a percentage of employee contributions. The amounts recognized as expense for this plan were approximately $147,000 and $96,000, for the years ended December 31,
2007 and 2006, respectively.

Embassy
participated in a multi-employer pension plan until it sold substantially all of its operating assets in October 2005. This plan provided defined benefits to all of its union
workers. Contributions to this plan were determined by the union contract. The Company does not administer the plan funds and does not have any control over the plan funds. As a result of Embassy's
withdrawal from the plan, it estimated and recorded a withdrawal liability of approximately $369,000, which is expected to be payable in quarterly installments of approximately $8,200 from May 2006
through February 2026. At December 31, 2007 the outstanding amount of this withdrawal liability was approximately $342,000, which is included in liabilities of discontinued operations. Further,
in connection with our sale of Embassy, we recorded the net present value of a receivable of approximately $90,000, which is scheduled to be collected at approximately $8,200 per quarter from May 2006
through May 2009.

(b)   Effective
January 1, 2007, the Company entered into an employment agreement with its Chairman, President and Chief Executive Officer (the "officer") that
supersedes a prior agreement dated May 30, 2001, as amended. The employment agreement provides for the officer to serve as the Company's President and Chief Executive Officer, and, if elected
by the Board of Directors, Chairman of the Board, for a term expiring on December 31, 2011, unless sooner terminated pursuant to the provisions of the employment agreement. Pursuant to the
employment agreement, the officer will receive a minimum annual base salary of $975,000. The officer's base salary will be reviewed annually by the Board and may be increased, but not decreased, from
time to time. The officer will be eligible for an annual discretionary incentive payment under the Company's Executive 162(m) Bonus Plan with a target of 90% of his then-current base
salary. The officer will also receive (i) senior executive level employee benefits, (ii) an annual payment of $45,064.37 to cover premiums on a life insurance policy, and (iii) a
Company-provided automobile.

In
the event the officer's employment is terminated by the Company without cause (as defined in the agreement), or the officer resigns for good reason (as defined in the agreement), then
subject to his execution of a general release, the officer will continue to receive his base salary for 18 months, a pro rata bonus for the year of termination, and the Company will pay his
monthly COBRA premiums until the earlier of (a) 18 months from the date of termination, (b) his becoming eligible for medical benefits from a subsequent employer, or
(c) his becoming ineligible for COBRA.

In
the event the officer's employment is terminated by the Company without cause or the officer resigns for good reason within two years following a change in control (as defined in the
agreement)

55

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or,
under certain circumstances, within six months prior to a change in control, then subject to the officer's execution of a general release, he will receive the pro rata bonus, the COBRA payments,
and a lump sum amount equal to the greater of (i) 18 months base salary or (ii) the lesser of (a) two times the sum of his base salary plus the amount of any bonus he
received for the year prior to the change in control, or (b) 3% of the value on the date of the change in control of the Company's outstanding shares on a fully diluted basis immediately prior
to the change in control. Notwithstanding the foregoing, amounts paid to the officer upon a change in control will be reduced to 2.99 times his "base amount" (as determined in accordance with
Sections 280G of the Internal Revenue Code of 1986, as amended).

Pursuant
to the employment agreement, during term of his employment and for a period of eighteen months after termination of his employment, the officer is prohibited from
(i) competing with the Company, (ii) soliciting or hiring the Company's employees, representatives or agents, or (iii) soliciting any of the Company's customers. The employment
agreement also prohibits the officer from using or disclosing any of the Company's non-public, proprietary or confidential information.

(c)   Florida
Pneumatic purchases nearly 90% of its pneumatic tools from a Far East trading company that owns or represents 21 individual factories in Japan, Taiwan and China.
Of the total pneumatic tool purchases in 2007, approximately 7% are bought from Japan, 26% from Taiwan and 66% from China. There are redundant sources for every product purchased and manufactured.

(d)   Woodmark
purchases most of its stair parts and kitchen and bath products through a longstanding relationship with a Far East trade partner that owns or represents 4
individual factories in China and Taiwan. Of the total stair parts and kitchen and bath product purchases, approximately 70% are bought from China and 10% from Taiwan. There are redundant sources for
most products purchased and manufactured.

(e)   Pacific
Stair purchases approximately 42% of its stair products from several suppliers in Mexico, China and Indonesia. Of the total stair products and materials
purchased, approximately 21% are purchased from Mexico and 20% from China. There are redundant sources for every product purchased and manufactured.

(f)    Most
of Nationwide's sales are products imported from Taiwan and China. Nationwide currently out-sources the manufacturing of approximately 94% of its
product with several overseas factories, while retaining design, QC, patent and trademark control. There are redundant sources for most products whether through dual manufacturing arrangements or back
up buy/sell arrangements.

(g)   At
December 31, 2007 and December 31, 2006, the Company had noncancelable inventory purchase commitments totaling approximately $9,562,000 and $9,919,000,
respectively.

(h)   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 position of the Company.

(i)    The
Company leases certain facilities and equipment. Generally, the facility leases carry renewal provisions and require the Company to pay maintenance costs. Rental
payments may be adjusted for increases in taxes and insurance above specified amounts. Rental expense for 2007 and 2006 amounted to approximately $929,000 and $860,000, respectively. Future minimum
payments under

56

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non-cancelable
operating leases with initial or remaining terms of more than one year as of December 31, 2007, were as follows:

2008

$
876,0002009


664,0002010


589,0002011


412,0002012


244,000Thereafter


103,000$
2,888,000


NOTE 14BUSINESS SEGMENTS

The Company has organized its business into two reportable business segments: "Tools and other products" and "Hardware and accessories". The Company is organized
around these two distinct product segments, each of which has very different end users. For reporting purposes, Florida Pneumatic, and Hy-Tech are combined in the Tools and other products
segment, while Woodmark, Pacific Stair and Nationwide are combined in the Hardware and accessories segment. Results for Hy-Tech for the year ending December 31, 2007 are from the
February 12, 2007, the date of acquisition, while Pacific Stair data are from January 3, 2006, the date of acquisition. The Company evaluates segment performance based primarily on
segment operating income. The accounting policies of each of the segments are the same as those described in Note 1.

The
following table presents financial information by segment for the years ended December 31, 2007 and 2006. Segment operating income excludes general corporate expenses,
interest expense and income taxes. Identifiable assets are those assets directly owned or utilized by the particular business segment.

Consolidated

Tools and
other products

Hardware and
accessoriesYear ended December 31, 2007Net revenues from unaffiliated customers

$
110,825,000

$
59,314,000

$
51,511,000Segment operating (loss) income

$
(13,017,000
)
$
2,562,000

$
(15,579,000
)General corporate expense


(5,703,000
)Interest expensenet


(2,918,000
)(Loss) from continuing operations before income taxes

$
(21,638,000
)Segment assets

$
76,960,000

$
44,504,000

$
32,456,000Corporate assets and assets of discontinued operations

$
6,310,000Total assets

$
83,270,000


57

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|
|

Consolidated

Tools and
other products

Hardware and
accessoriesYear ended December 31, 2006Net revenues from unaffiliated customers

$
111,733,000

$
44,657,000

$
67,076,000Segment operating income

$
13,634,000

$
3,417,000

$
10,217,000General corporate expense


(5,182,000
)Interest expensenet


(1,973,000
)Earnings from continuing operations before income taxes

$
6,479,000Segment assets

$
85,054,000

$
25,059,000

$
59,995,000Corporate assets and assets of discontinued operations


5,371,000Total assets

$
90,425,000


The
Tools segment has one customer that accounted for approximately 19.1% and 17.8%, of consolidated revenue for the years ended December 31, 2007, and 2006, respectively, as well
as 26.3% and 37.8% of consolidated accounts receivable as of December 31, 2007 and 2006, respectively.

A
second customer accounted for 8.4% and 9.8%, of consolidated revenue for the years ended December 31, 2007 and 2006, respectively, and 9.1% and 11.5% of consolidated accounts
receivable as of December 31, 2007 and 2006, respectively. The Company has been informed that it will be phased out as a vendor for this customer likely commencing sometime during the second
quarter of 2008. We do not believe this will have a significant impact on the Company's consolidated results for the full year of 2008. There are no significant customers in the Hardware segment.

NOTE 15RELATED PARTY TRANSACTIONS

(a)   The
Company and Sidney Horowitz, a director and father of Richard A. Horowitz, the Company's Chairman, Chief Executive Officer and President, were parties to a
Consulting Agreement, which terminated on October 31, 2006, pursuant to which Mr. Sidney Horowitz received $62,500 in consulting fees for the year ended December 31, 2006.

(b)   One
of the Company's directors is a principal of an insurance brokerage firm that the Company utilizes for the purchase of business-related insurance products. Total
premiums paid through this insurance brokerage firm were $305,000 and $422,000 for the years ended December 31, 2007 and 2006, respectively.

(c)   In
connection with the purchase of certain assets, Pacific Stair entered into a lease agreement with the president of the company from which the assets were acquired by
Pacific Stair, expiring in August 2008, for the manufacturing facility that he owns for average annual rental payments of approximately $113,000. Such individual resigned as an officer and employee of
Pacific Stair on December 31, 2006.

(d)   In
connection with the purchase of certain assets of Woodmark, the Company assumed certain notes, aggregating $3,504,000 at December 31, 2006 to the then
president of Woodmark. The notes were paid in full in July, 2007.

(e)   The
president of one of our subsidiaries is part owner of one of the subsidiary's vendors. During the year ended December 31, 2007, we purchased approximately
$959,000 of product from this

58

---



vendor.
All transactions are conducted at arms length. The Company did not conduct any business with this vendor in 2006.

NOTE 16UNAUDITED QUARTERLY RESULTS

|                                                           |                                                            | Quarter Ended |           
|---------------------------------------------------------- | ---------------------------------------------------------- | ------------- | ----------
|
|2007                                                       |                                                            |               |           
|Net revenue                                                |                                                            | $             | 24,958,887
|Gross profit                                               |                                                            | $             | 7,747,603 
|Earnings (loss) from continuing operations                 |                                                            | $             | 146,756   
|(Loss) earnings from discontinued operations, net of taxes |                                                            |               | (20,967   
|                                                           |                                                            |               |           
|Net earnings (loss)                                        |                                                            | $             | 125,789   
|                                                           |                                                            |               |           
|Basic earnings (loss) per common share:                    |                                                            |               |           
|                                                           | Earnings (loss) from continuing operations                 |               | $         
|                                                           | Earnings from discontinued operations, net of taxes        |               |           
|                                                           |                                                            |               |           
|                                                           | Net earnings (loss)                                        |               | $         
|                                                           |                                                            |               |           
|Diluted earnings (loss) per common share:                  |                                                            |               |           
|                                                           | Earnings (loss) from continuing operations                 |               | $         
|                                                           | (Loss) earnings from discontinued operations, net of taxes |               |           
|                                                           |                                                            |               |           
|                                                           | Net earnings (loss)                                        |               | $         
|                                                           |                                                            |               |           
|Weighted average common shares outstanding:                |                                                            |               |           
|                                                           | Basic                                                      |               |           
|                                                           |                                                            |               |           
|                                                           | Diluted                                                    |               |           
|                                                           |                                                            |               |           

59

---



|
|

|                                                           |                                                            | Quarter Ended
|---------------------------------------------------------- | ---------------------------------------------------------- | -------------
|
|2006                                                       |                                                            |              
|Net revenue                                                |                                                            | $            
|Gross profit                                               |                                                            | $            
|Earnings from continuing operations                        |                                                            | $            
|Earnings (loss) from discontinued operations, net of taxes |                                                            |              
|                                                           |                                                            |              
|Net earnings                                               |                                                            | $            
|                                                           |                                                            |              
|Basic earnings per common share:                           |                                                            |              
|                                                           | Earnings from continuing operations                        |              
|                                                           | Earnings (loss) from discontinued operations, net of taxes |              
|                                                           |                                                            |              
|                                                           | Net earnings                                               |              
|                                                           |                                                            |              
|Diluted earnings per common share:                         |                                                            |              
|                                                           | Earnings from continuing operations                        |              
|                                                           | Earnings (loss) from discontinued operations, net of taxes |              
|                                                           |                                                            |              
|                                                           | Net earnings                                               |              
|                                                           |                                                            |              
|Weighted average common shares outstanding:                |                                                            |              
|                                                           | Basic                                                      |              
|                                                           |                                                            |              
|                                                           | Diluted                                                    |              
|                                                           |                                                            |              

60

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P&F INDUSTRIES INC. AND SUBSIDIARIES    SCHEDULE II    VALUATION AND QUALIFYING ACCOUNTS

|                                                  |  | Column A |           | Column B |   | Column C  |  | Column D |           | Column E
|------------------------------------------------- |  | -------- | --------- | -------- | - | --------- |  | -------- | --------- | --------
|
|Allowance for doubtful accounts:                  |  |          |           |          |   |           |  |          |           |         
|Year ended December 31,2007                       |  | $        | 223,077   |          | $ | 420,352   |  | $        | 36,000    |         
|                                                  |  |          |           |          |   |           |  |          |           |         
|Year ended December 31, 2006                      |  | $        | 189,586   |          | $ | 59,689    |  | $        |          |         
|                                                  |  |          |           |          |   |           |  |          |           |         
|Reserve for obsolete and slow moving inventories: |  |          |           |          |   |           |  |          |           |         
|Year ended December 31,2007                       |  | $        | 1,829,325 |          | $ | 403,604   |  | $        | 1,896,975 |         
|                                                  |  |          |           |          |   |           |  |          |           |         
|Year ended December 31, 2006                      |  | $        | 1,981,196 |          | $ | 276,099   |  | $        |          |         
|                                                  |  |          |           |          |   |           |  |          |           |         
|Provision for warranty obligations:               |  |          |           |          |   |           |  |          |           |         
|Year ended December 31,2007                       |  | $        | 367,549   |          | $ | 1,034,674 |  | $        |          |         
|                                                  |  |          |           |          |   |           |  |          |           |         
|Year ended December 31, 2006                      |  | $        | 418,811   |          | $ | 472,512   |  | $        |          |         
|                                                  |  |          |           |          |   |           |  |          |           |         

61

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A(T).    Controls and Procedures

Evaluation of disclosure controls and procedures

We maintain disclosure and control procedures that are designed to ensure that information required to be disclosed in reports filed under to the Securities and
Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Our
management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2007. Based upon that evaluation, the
chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2007.

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) of the Exchange Act). This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external purposes in accordance with generally accepted accounting principles.

Our
internal control over financial reporting includes those policies and procedures that:



At
the conclusion of the year ended December 31, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the design and operation of our internal control over financial reporting. Management based this assessment on criteria for
effective internal control over financial reporting described in "Internal ControlIntegrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based upon that evaluation, the chief executive officer and chief financial Officer concluded that our internal controls over financial reporting was effective as of December 31, 2007.

Because
of its inherent limitations, internal controls may not prevent or detect misstatements. A control system, no matter how well designed and operated, can only provide reasonable,
not absolute, assurance that the control system's objectives will be met. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become
inadequate because

62

---



of
changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.

This
annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only
management's report in this annual report.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

None

63

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K is incorporated by
reference to the Company's definitive proxy statement in connection with its Annual Meeting of Stockholders scheduled to be held in 2008, to be filed with the Securities and Exchange Commission within
120 days following the end of the Company's year ended December 31, 2007.

Item 11.    Executive Compensation

See Item 10.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

See Item 10.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

See Item 10.

Item 14.    Principal Accountant Fees and Services

See Item 10.

64

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

|                                                                                                                                                                                                                  |                                                                           |                                                                                                                                                                                   |  | Page
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|a)                                                                                                                                                                                                                | List of Financial Statements, Financial Statement Schedules, and Exhibits |                                                                                                                                                                                   | 
|                                                                                                                                                                                                                  | (1)                                                                       | List of Financial Statements                                                                                                                                                      |  |     
|                                                                                                                                                                                                                  |                                                                           | The consolidated financial statements of the Company and its subsidiaries are included in Item 8 of Part II of this report.                                                       |  | 23  
|                                                                                                                                                                                                                  | (2)                                                                       | List of Financial Statement Schedules                                                                                                                                             |  |     
|                                                                                                                                                                                                                  |                                                                           | The following financial statement schedules of the Company and its subsidiaries are included in Item 8 of Part II of this report following the consolidated financial statements: |  |     
|                                                                                                                                                                                                                  |                                                                           | Schedule IIValuation and Qualifying Account and Reserves                                                                                                                         |  | 61  
|All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and, therefore,
have been omitted.
|                                                                                                                                                                                                                  | (3)                                                                       | List of Exhibits                                                                                                                                                                  |  | 66  

65

---



The following exhibits are either included in this report or incorporated herein by reference as indicated below:

|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1            |  | 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.
|2.2            |  | 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.                                                                                                                                                                                                                                            
|2.3            |  | 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 quarter ended June 30, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|2.4            |  | 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.                                                                                                                                                                                                                                                                                                
|2.5            |  | 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.                                                                                                                                                                                                                                                                                                          
|2.6            |  | Asset Purchase Agreement, effective as of February 12, 2007, Hy-Tech Machine, Inc., a Delaware corporation, Hy-Tech Machine, Inc., a Pennsylvania corporation, Quality Gear and Machine, Inc. and HTM Associates (Incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated February 14, 2007). Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish, supplementally, a copy of any exhibit or
schedule omitted from the Asset Purchase Agreement to the Commission upon request.                                                                                                                                                                                                  
|2.7            |  | Agreement of Sale, effective as of February 12, 2007, Hy-Tech Machine, Inc., and HTM Associates (Incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated February 14, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

66

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|3.2 |  | By-laws of the Registrant, as amended (Filed herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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., 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).                           

67

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|4.8  |  | Amendment No. 6 to Credit Agreement, dated August 31, 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 August 31, 2006).                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.9  |  | Amendment No. 7 to Credit Agreement, dated February 12, 2007, 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., Continental Tool Group, Inc., Hy-Tech Machine, 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 February 14, 2007).                                     
|4.10 |  | Amendment No. 8 to Credit Agreement, dated as of June 29, 2007, 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., Continental Tool Group, Inc. and Hy-Tech Machine, 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 29, 2007).                                   
|4.11 |  | Amendment No. 9 and Waiver to Credit Agreement, dated as of November 9, 2007, 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., Continental Tool Group, Inc., Hy-Tech Machine, Inc. and Citibank, N.A., as Administrative Agent,
and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
|4.12 |  | Amendment No. 10 and Waiver to Credit Agreement, dated as of March 25, 2008, 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., Continental Tool Group, Inc., Hy-Tech Machine, Inc. and Citibank, N.A., as Administrative Agent,
and the lenders party thereto (Filed herein).                                                                                                                         
|4.13 |  | 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 and amended October 24, 2005, 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 September 30, 2006 and incorporated by reference to Exhibits 10.1 and 10.2 to the Registrant's Current Report on Form 8-K dated October 28, 2005).                                                                                                                                                                                                 

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|10.2  |  | Amendment to the Second Amended and Restated Employment Agreement, dated as of October 24, 2005, between the Registrant and Richard A. Horowitz and the 1994 Richard A. Horowitz Family Trust (Incorporated by reference to Exhibits 10.1 and
10.2 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  |  | Executive Employment Agreement, dated February 12, 2007, among the Registrant and Richard A. Horowitz (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated February 12, 2007).                                                                                                 
|10.5  |  | 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  |  | Executive 162(m) Bonus Plan of the Registrant effective as of January 1, 2006 (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated May 31, 2006).                                                                                                                              
|10.8  |  | 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).                                                                                                      
|10.9  |  | 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).                                                                 
|10.10 |  | Contract of Sale, dated February 26, 2007, between the Registrant and Tell Realty LLC (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated February 27, 2007).                                                                                                                 
|21    |  | Subsidiaries of the Registrant (Filed herein).                                                                                                                                                                                                                                                                            
|23.1  |  | Consent of the Registrant's Independent Registered Public Accounting Firm (Filed herein).                                                                                                                                                                                                                                 
|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 Annual Report on Form 10-K 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.

69

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

P&F INDUSTRIES, INC.(Registrant)

|By: |  | /s/RICHARD A. HOROWITZRichard A. Horowitz
Chairman of the Board
President
Principal Executive Officer
Principal Operating Officer
Date: March 28, 2008 |  |  |  | By: |  | /s/JOSEPH A. MOLINO, JR.Joseph A. Molino, Jr.
Vice President
Principal Financial and
Accounting Officer
Date: March 28, 2008
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the date indicated.

|Name                                      |  | Title    |  | Date          
|----------------------------------------- |  | -------- |  | --------------
|                                          |  |          |  |               
|/s/ROBERT L. DUBOFSKYRobert L. Dubofsky   |  | Director |  | March 28, 2008
|/s/JEFFREY D. FRANKLINJeffrey D. Franklin |  | Director |  | March 28, 2008
|/s/ALAN GOLDBERGAlan Goldberg             |  | Director |  | March 28, 2008
|/s/RICHARD A. HOROWITZRichard A. Horowitz |  | Director |  | March 28, 2008
|/s/SIDNEY HOROWITZSidney Horowitz         |  | Director |  | March 28, 2008
|/s/DENNIS KALICKDennis Kalick             |  | Director |  | March 28, 2008
|/s/KENNETH M. SCHERIFFKenneth M. Scheriff |  | Director |  | March 28, 2008
|/s/MITCHELL A. SOLOMONMitchell A. Solomon |  | Director |  | March 28, 2008
|/s/ROBERT M. STEINBERGRobert M. Steinberg |  | Director |  | March 28, 2008
|/s/MARC A. UTAYMarc A. Utay               |  | Director |  | March 28, 2008

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