EXHIBIT 13

                             Selected Financial Data
                 (Dollars in thousands except per share amounts)

<TABLE>


------------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                                          <C>            <C>             <C>           <C>            <C>
Year Ended December 31,                                          1996           1995            1994          1993           1992
------------------------------------------------------------------------------------------------------------------------------------
Net sales................................................      $160,323        $141,268       $121,470       $100,665       $88,328
Cost of products sold....................................       111,027          96,190         83,128         70,979        61,127
Income taxes.............................................         8,264           8,323          6,686          4,548         4,219
Income before cumulative effect of 1993 and 1992
  accounting changes.....................................        13,858          13,798         10,441          6,929         6,327
Net income...............................................        13,858          13,798         10,441          7,352         8,127
Capital expenditures.....................................        25,266          17,213          3,833          8,354         3,395
Depreciation.............................................         5,343           4,165          3,425          3,180         2,855
Total assets.............................................       138,538          96,074         82,127         73,542        67,132
Stockholders' equity.....................................       121,137          76,091         65,910         57,819        52,498
Working capital..........................................      $ 64,233        $ 38,881       $ 41,612       $ 34,953       $35,112
Number of employees (at year end)........................         1,330           1,211          1,088          1,008           978
Average number of common shares outstanding used
  to compute per share information (in thousands)........         7,748           6,828*         6,828*         6,828*        6,828*
Per share information:
  Income before cumulative effect of 1993 and 1992
    accounting changes...................................      $   1.79        $   2.02*      $   1.53*      $   1.01*      $   .93*
  Net income.............................................          1.79            2.02*          1.53*          1.08*         1.19*
  Stockholders' equity...................................         15.63           11.15*          9.65*          8.47*         7.69*
  Dividends..............................................      $    .37        $    .50*      $    .38*      $    .29*      $   .25*
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Share and per share amounts have been restated to give effect to a 4-for-1
split of the Company's common stock, effected through a stock dividend, to
shareholders of record on May 3, 1996.

                                       9


<PAGE>



                 Management's Discussion and Analysis of Results
                      of Operations and Financial Condition
                                December 31, 1996

The Company's operations consist of two business segments: PEM(R) brand
self-clinching fasteners, including PEMSERTER(R) fastener insertion machines,
and Pittman(R) dc motors. Self-clinching fasteners, which accounted for
approximately 82% of the Company's consolidated net sales in 1996 compared to
80% in 1995 and 79% in 1994, are marketed through a worldwide network of
independent authorized distributors and two Company-owned distributors. In 1996,
sales to the computer/electronics and automotive industries accounted for
approximately 88% and 5% of fastener sales, respectively, with the balance
distributed among other industries such as recreational equipment and commercial
appliances.

Motors accounted for approximately 18% of the Company's consolidated net sales
in 1996 compared to 20% in 1995 and 21% in 1994, and are marketed in the United
States and Europe through independent sales representatives. The Company
primarily designs and manufactures its motors on a custom basis. End users of
the Company's motors include manufacturers of computer and electronics
equipment, hospital emergency/surgery equipment, and industrial equipment. The
Company's motor segment consists of the traditional brush-commutated motors and
longer lasting brushless motors which have a higher profit margin.

The number of fastener units shipped from the Company's manufacturing facilities
to all customers, including independent and Company owned distributors,
increased 17.0% from 1.57 billion in 1994, to 1.84 billion in 1995, and then
another 10.3% to 2.03 billion in 1996. Motor units shipped increased from
673,000 in 1994, to 680,000 in 1995, to 735,000 in 1996.

In 1996 and 1995, the Company's domestic and foreign customers accounted for 75%
and 25%, respectively, of the Company's sales compared to 78% and 22% in 1994.
The Company's export sales have benefited from the Company's ability to serve
large multi-national computer and electronic manufacturers who have moved some
of their product fabrication offshore. The Company has maintained significant
distribution channels and inventories in Europe and the Pacific Rim for more
than 25 years and 10 years, respectively. In addition, the Company maintains an
inventory of approximately 115 million fastener units at its Danboro facility.
As a result of increasing the availability of its products, the Company has
supported growth in its sales and positioned itself to meet the needs of its
customers in the North American, European, and Pacific Rim markets.

To better meet the Pacific Rim demand for its fasteners, the Company acquired,
through a subsidiary, the assets of its former Singapore distributor and created
a master warehouse in Singapore that will serve the same function as the
existing Company warehouse in England. These warehouse facilities in England and
Singapore allow the Company to ship product in bulk via ocean freight rather
than more costly air shipments directly to the end user. The Company has
established application engineering capabilities in England and plans to do the
same in Singapore. While the Company's international pricing is consistent with
its domestic pricing, the Company's profits from export sales may be affected to
some extent by freight costs, currency fluctuations, duties and local
administrative costs. The Company did not experience any material impact from
these factors in 1996.

Prior to 1996, the Company had been able to sustain its fastener profit margins
and achieve steady improvements in fastener profitability largely as a result of
(i) increased customer demand for its product, (ii) focus on cost containment
and improved productivity, and (iii) the general ability to provide the right
product at the right time and at the right location to support customer
applications. The Company's fastener gross profit margins increased from 32.7%
in 1994 to 32.9% in 1995 primarily because of the Company's ability to increase
the production and shipment of fasteners without a proportional increase in
fixed costs and overhead. However, in the first half of 1996, the Company's
fastener operation worked at full or near full capacity to meet strong demand
for the Company's products. Overtime and higher than planned outside
supplemental screw machine support increased manufacturing costs at the
Company's fastener operation. This increase, along with an inability to pass on
raw material price increases, caused fastener gross profit margins to decline
from 32.7% in 1995 to 31.8% in 1996 and contributed to consolidated gross profit
margins declining from 31.9% in 1995 to 30.7% in 1996.

Price increases on the Company's fastener products have averaged 2.5% to 3.0%
annually since 1994. On January 1, 1996, the Company announced a 2.8% price
increase on most fastener products, which became effective April 1, 1996. This
increase partially offset the cost increases mentioned above and contributed to
increased fastener and consolidated gross profit margins in the second, third,
and fourth quarters of 1996.

The Company has incurred approximately $42 million in capital expenditures in
the last two years primarily to increase production capacity in the fastener
segment of its business. The Company's objective is to reduce current overtime
levels and delivery lead times of the Company's products and enhance the
Company's ability to respond to new growth opportunities. The Company typically
experiences a period of six to nine months between the ordering of equipment and
its full inclusion into the manufacturing process because of equipment
manufacturers' lead times and the training of new employees.

The motor division's gross profit margins increased from 27.2% in 1994 to 28.0%
in 1995 before declining to 26.1% in 1996. An emphasis on demand-flow technology
allowed Pittman to move away from batch size manufacturing and reduce work-in-
process inventory. These actions improved process flow and component assembly
productivity and were a major contributor to improved gross profits in 1995.
However, a shift to less profitable brush-type motors and higher fixed costs,
in 1996 compared to 1995, led to lower gross profits at the motor division
in 1996.

                                       10

<PAGE>


Results of Operations

The following table sets forth for the periods indicated certain information
derived from the Company's consolidated statements of income expressed in
dollars and as a percentage of total net sales and segment sales. There can be
no assurance that the trends in operating results will continue in the future:

<TABLE>
Years Ended December 31,                                               1996                    1995                     1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                Amount          %        Amount         %         Amount      %
                                                              ----------------------------------------------------------------------
                                                                                  (Dollars in Thousands)
NET SALES
<S>                                                             <C>             <C>      <C>            <C>       <C>           <C>
  Fasteners................................................     $130,721        81.5     $113,323       80.2      $ 96,067      79.1
  Motors...................................................       29,602        18.5       27,945       19.8        25,403      20.9
                                                              ----------------------------------------------------------------------
    Total..................................................     $160,323       100.0     $141,268      100.0      $121,470     100.0
                                                              ======================================================================

  Domestic.................................................     $119,640        74.6     $105,831       74.9      $ 93,979      77.4
  Foreign..................................................       40,683        25.4       35,437       25.1        27,491      22.6
                                                              ----------------------------------------------------------------------
    Total..................................................     $160,323       100.0     $141,268      100.0      $121,470     100.0
                                                              ======================================================================
</TABLE>



<TABLE>
Years Ended December 31,                                               1996                    1995                     1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                Amount          %        Amount         %         Amount      %
                                                              ----------------------------------------------------------------------
                                                                                  (Dollars in Thousands)
GROSS PROFIT BY SEGMENT
<S>                                                             <C>             <C>      <C>            <C>       <C>           <C>
  Fasteners................................................     $ 41,557        31.8     $ 37,258       32.9      $ 31,427      32.7
  Motors...................................................        7,739        26.1        7,820       28.0         6,914      27.2

                                                              ----------------------------------------------------------------------
TOTAL COMPANY
  Gross profit.............................................     $ 49,296        30.7     $ 45,078       31.9      $ 38,342      31.6
  Selling, general & administrative expenses...............       28,177        17.6       24,056       17.0        21,842      18.0
  Operating profit.........................................       21,119        13.2       21,022       14.9        16,500      13.6
  Net income...............................................       13,858         8.6       13,798        9.8        10,441       8.6
                                                              ----------------------------------------------------------------------
</TABLE>


Year Ended December 31, 1996 vs.
Year Ended December 31, 1995

Consolidated net sales for 1996 were $160.3 million, versus $141.3 million in
1995, a 13.5% increase. This growth in sales was largely the result of the
growth of the personal computer and electronics markets over the same period.
Sales to customers outside the United States for 1996 were $40.7 million, versus
$35.4 million in 1995, a 14.8% increase. Net sales for the fastener operation
for 1996 were $130.7 million, versus $113.3 million in 1995, a 15.4% increase.
Motor sales increased 5.9% from the $27.9 million recorded in 1995 to $29.6
million for the year ended December 31, 1996.

The Company's average selling price for fasteners shipped in 1996 increased
approximately 4.6% from $57.95 per thousand fasteners sold in 1995 to $60.59 per
thousand fasteners sold in 1996 mainly due to a change in product mix and a 2.8%
price increase effective in the second quarter of 1996. The average selling
price of Pittman motors declined 2.1% from $41.15 per motor in 1995 to $40.29
per motor in 1996 as a result of a change in product mix toward lower profit
brush type motors. The Company's brushless motors have an average price of
approximately $210 per unit, reflecting more expensive materials and higher
labor content, and are used in equipment requiring a high degree of reliability,
while brush-commutated motors have an average price of $40 per unit and are
typically used in less critical/demanding volume related equipment. The
percentage of total motor sales represented by brushless motors was 21.4% in
1996 compared to 22.5% in 1995.

The number of fasteners sold to independent customers increased approximately
10.2% from 1995 to 1996. The number of fasteners sold within North America
increased approximately 12.3% from 1995 to 1996, and represented approximately
74.4% of total fasteners sold in 1996 compared to 72.1% in 1995. The number of
fasteners sold into the Europe and Asia-Pacific markets increased 3.4% and 9.3%,
respectively, from 1995 to 1996 and represented approximately 19.9% and 5.7%,
respectively, of total fasteners sold in 1996. The continued strong demand for
personal computers as well as other electronic equipment was the main cause of
the increased sales volume. However, the rate at which sales volume grew slowed
from prior years because of excess distributor inventory in some fastener
product lines. The number of motors sold increased approximately 8.1% from
679,183 in 1995 to 734,741 in 1996.

Consolidated gross profit was $49.3 million in 1996, versus $45.1 million in
1995, a 9.4% increase. Fastener gross profit margins increased 11.5% from $37.3
million in 1995 to $41.6 million in 1996 mainly as a result of a greater number
of fasteners manufactured and sold in 1996 compared to 1995. However, as a
percent of sales, fastener gross profit decreased from 32.9% in 1995 to 31.8% in
1996 because cost increases incurred for raw material, outside screw machine
services, and tooling were not fully offset by price increases, production
efficiencies, and cost containment. The fastener division also incurred
additional one-time expenses associated with the moving of equipment into its
new manufacturing facility in Danboro.

Motor gross profit decreased 1.0% from $7.8 million in 1995 to $7.7 million in
1996 due to higher fixed costs in the manufacturing engineering departments and
a shift, dictated by customer demand, toward the manufacture and shipment of
less profitable brush type motors. Motor gross profit margins declined from
28.0% in 1995 to 26.1% in 1996.

Consolidated selling, general, and administrative expenses ("SG&A") for 1996
were $28.2 million, versus $24.1 million for 1995, a 17.1% increase. SG&A, as a
percent of sales, increased from 17.0% in 1995 to 17.6% in 1996. Additional SG&A
staff, wage increases for current staff, the establishment of a Singapore
distribution center, and increased legal, investor relations and other
professional fees related to the Company's 1996 public offering contributed to
the increased SG&A.

                                       11

<PAGE>

Consolidated net income for 1996 was $13.9 million, versus $13.8 million for
1995. Other income, which includes investment income and realized currency
translation gains, decreased 8.7% as a result of decreased investment income
during the first six months of 1996, related to capital equipment expenditures
and less favorable foreign currency exchange rates in 1996 compared to 1995.

In the fourth quarter of 1996, the Company changed its method of calculating
the index on its domestic fastener LIFO inventory from the unit cost method to
the components of cost method. Management believes that this change in its LIFO
method of application better reflects the effects of inflation and results in a
more representative LIFO cost index for product mix changes. The effect of this
change was to increase net income for 1996 by $910,000.

Year Ended December 31, 1995 vs.
Year Ended December 31, 1994

Consolidated net sales for 1995 were $141.3 million, versus $121.5 million in
1994, a 16.3% increase. Sales to customers outside the United States for 1995
were $35.4 million, versus $27.5 million in 1994, a 28.9% increase. Net sales of
the fastener operation for 1995 were $113.3 million, versus $96.1 million in
1994, a 17.9% increase. Motor sales increased 10.0% from the $25.4 million
recorded in 1994 to $27.9 million for the year ended December 31, 1995.

The number of fasteners sold to independent customers increased approximately
17.7% from 1994 to 1995. Shipment of fasteners within North America increased
approximately 12.2% from 1994 to 1995, and represented approximately 72.1% of
total fasteners sold in 1995. The number of fasteners sold into the Europe and
Asia-Pacific markets increased 37.2% and 26.4%, respectively, from 1994 to 1995
and represented approximately 21.9% and 6.0%, respectively, of total fasteners
sold in 1995. The continued strong demand for personal computers as well as
other electronic equipment, which accounted for approximately 90.0% of fastener
sales in 1994 and 1995, was the main cause of the increased shipment volume. The
number of motors sold increased approximately 1.0% from 1994 to 1995.

Average selling prices for fasteners shipped in 1995 increased approximately
0.5% from $57.70 per thousand fasteners sold in 1994 to $57.95 per thousand
fasteners sold in 1995. The average selling price of motors increased 8.9% from
$37.76 in 1994 per motor to $41.12 per motor in 1995 due to a shift in product
mix towards higher-priced brushless motors and motors with additional features
and options. During 1995, brushless motor sales, which carry a higher profit,
comprised 21.7% of total motor sales compared to 16.8% in 1994.

Consolidated gross profit was $45.1 million in 1995, versus $38.3 million for
1994, a 17.8% increase. Fastener gross profit increased 18.6% from $31.4 million
in 1994 to $37.3 million in 1995. As a percent of sales, fastener gross profit
margin increased from 32.7% in 1994 to 32.9% in 1995 as a result of the
increased number of units sold without a proportionate increase in cost. As a
result of the continuing increase in demand for the Company's fasteners,
manufacturing operations were nearly at full capacity, allowing the Company to
realize economies of scale with regard to its fixed expenses. In addition,
increases in raw material costs were offset by cost reductions within the
manufacturing departments. Motor gross profit increased from $6.9 million in
1994 to $7.8 million in 1995 and gross profit as a percent of sales increased
from 27.2% in 1994 to 28.0% in 1995.

Consolidated SG&A for 1995 were $24.1 million, versus $21.8 million in 1994, a
10.1% increase. However, as a percentage of sales, SG&A declined from 18.0% in
1994 to 17.0% in 1995. Selling expenses, as a percentage of sales, declined
because sales on which the Company does not pay commissions increased in 1995
compared to 1994. The Company's sales to the Common Market are effected through
its subsidiary and independent distributors and carry no commission related
expenses. These sales increased approximately 29% in 1995 compared to 1994. In
addition, growth in the Company's general and administrative staff was less than
the increase in the Company's sales.

Consolidated net income for 1995 was $13.8 million, versus $10.4 million in
1994, a 32.7% increase. Increased investment income and favorable exchange rates
in 1995 contributed $.5 million to other income in 1995. The Company's effective
tax rate decreased from 39.0% in 1994 to 37.6% in 1995. This reduction was
caused primarily by a Pennsylvania state income tax rate reduction that was
retroactive to the beginning of 1995. These factors, combined with the operating
efficiencies associated with increased capacity utilization, and the increased
sales volume, all contributed to the increase in net income in 1995.

Liquidity and Capital Resources

Liquidity needs for the year ended December 31, 1996 consisted primarily of
$25.3 million of capital expenditures which included the completion of a 43,000
square foot addition to the Company's Danboro facility and for producing
inventories to support the European and Asia-Pacific markets. The inventory
increase included $3.0 million of finished goods inventory acquired in
connection with the acquisition of the Company's distributor in Singapore. The
Company's primary sources of cash in 1996 came from the public offering of
1,850,000 shares of non-voting common stock, for which the Company received net
proceeds of $33.3 million.

Part of the proceeds of the public offering were used to repay all outstanding
short-term borrowings and to fund the $25.3 million 1996 capital expenditure
program. The remainder of the proceeds will be used primarily to finance 1997
capital expenditures including approximately $8.5 million for the construction
of a new fastener manufacturing facility in Winston-Salem, N.C. and new
equipment for that facility.

At December 31, 1996, the Company also had approximately $27.5 million available
under its short-term lines of credit. Working capital increased to $64.2 million
in 1996 from $38.9 million in 1995 and $41.6 million in 1994 as a result of the
public offering proceeds and the increased accounts receivable and inventory
both from increased sales and the purchase of the Singapore distributor.
Accordingly, the Company anticipates that its existing capital resources and
cash flow generated from future operations will enable it to maintain its
current level of operations and its planned growth for the foreseeable future.

Stockholders' equity per share at the end of 1996 was $15.63 compared to $11.15
at year-end 1995 and $9.65 at year-end 1994. The 1995 and 1994 amounts have been
restated to adjust for a 4-for-1 stock split, effected by a stock dividend,
distributed to stockholders in May 1996.

The Company, along with a large number of other entities, has been designated a
potentially responsible party (PRP) subject to joint and several liability for
the cost of two superfund sites by the US Environmental Protection Agency under
the Comprehensive Environmental Response, Compensation and Liability Act. Based
on the Company's assessment of the costs associated with its environmental
responsibilities, compliance with federal, state and local laws regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, have not had and in the opinion of Company's
management, will not have, a material effect on the Company's financial
condition.


                                       12

<PAGE>

                        Selected Quarterly Financial Data
          (Unaudited, in thousands except per share amounts and prices)

<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                        1996 Quarter Ended
------------------------------------------------------------------------------------------------------------------------------------
                                                                 Mar. 31        June 30       Sept. 30       Dec. 31   Total Year
                                                              ----------------------------------------------------------------------
<S>                                                             <C>             <C>            <C>          <C>         <C>
Net sales................................................       $39,029         $41,482        $38,714      $41,098     $160,323
Gross profit.............................................        11,617o         13,444o        12,250o      11,985o      49,296
Net income...............................................         2,908o          3,970o         3,660o       3,320o      13,858
Net income per share.....................................           .42*o           .58*o          .42o         .37o        1.79
Dividends declared per share.............................           .07*            .10*           .10          .10          .37
                                                              ----------------------------------------------------------------------
Market prices per share:
Class A Common Stock (PNNA)
  High...................................................            24*             27 1/8*        19 1/8       20 5/8       27 1/8
  Low....................................................            21 1/4*         18 1/8*        15           16 7/8       15
Common Stock (PNN)
  High...................................................           N/A              26 7/8         23 7/8       20 3/4       26 7/8
  Low....................................................           N/A              18 3/8         16 7/8       17 1/4       16 7/8
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
oRestated to reflect LIFO method accounting change (See Note 3).
*Per share data has been restated to give effect to a 4-for-1 stock split,
effected by a stock dividend, to shareholders of record on May 3, 1996.


<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                        1995 Quarter Ended
------------------------------------------------------------------------------------------------------------------------------------
                                                                 Mar. 31        June 30       Sept. 30      Dec. 31    Total Year
                                                              ----------------------------------------------------------------------
<S>                                                             <C>            <C>             <C>          <C>         <C>
Net sales................................................       $35,299        $36,898         $34,080      $34,991     $141,268
Gross profit.............................................        10,669         11,753          10,403       12,253       45,078
Net income...............................................         3,023          3,457           3,384        3,934       13,798
Net income per share*....................................           .44            .51             .50          .57         2.02
Dividends declared per share*............................           .07            .07             .07          .29+         .50
                                                              ----------------------------------------------------------------------
Market prices per share:
Class A Common Stock
  High*..................................................            14 3/4         18 7/8          25 1/8       24 1/4       25 1/8
  Low*...................................................            10 5/8         13 1/2          18 3/8       19 1/4       10 5/8
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+Includes a regular dividend of $.07 per share and an extra dividend of $.22 per
share on a restated basis.
*Per share data has been restated to give effect to a 4-for-1 stock split,
effected by a stock dividend, to shareholders of record on May 3, 1996.


The common stock of Penn Engineering & Manufacturing Corp. is traded on the
New York Stock Exchange.

Symbols: PNN & PNNA

Lines of Business

The manufacture and sale of fastener products and electric motors are the
Company's only lines of business. Certain information on percent of net sales
and percent of operating profits attributable to these lines of business for the
last three years is as follows:

<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                                                             1996           1995         1994
------------------------------------------------------------------------------------------------------------------------------------
Net Sales
<S>                                                                                                  <C>           <C>          <C>
  Fastener products.............................................................................     82%           80%          79%
  Electric motors...............................................................................     18            20           21
Operating Profit
  Fastener products.............................................................................     89            87           86
  Electric motors...............................................................................     11            13           14
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       13


<PAGE>


                           Consolidated Balance Sheets
                             (Dollars in thousands)

<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
At December 31,                                                                                              1996            1995
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S>                                                                                                         <C>            <C>
  Cash and cash equivalents..........................................................................       $ 4,208        $ 1,459
  Short-term investments.............................................................................        10,858          5,988
  Accounts receivable (less allowance for doubtful accounts--1996, $1,000; 1995, $900)...............        28,580         20,845
  Refundable income taxes............................................................................           246             --
  Inventories........................................................................................        27,533         20,275
  Deferred income taxes..............................................................................           391            959
  Other current assets...............................................................................         2,125          2,557
                                                                                                          --------------------------
    Total current assets.............................................................................        73,941         52,083
                                                                                                          --------------------------
PROPERTY--At cost:
  Land and improvements..............................................................................         4,358          3,699
  Buildings and improvements.........................................................................        22,417         15,843
  Machinery and equipment............................................................................        74,486         57,295
                                                                                                          --------------------------
    Total............................................................................................       101,261         76,837
  Less accumulated depreciation......................................................................        39,429         34,896
                                                                                                          --------------------------
    Total property--net..............................................................................        61,832         41,941
                                                                                                          --------------------------
OTHER ASSETS.........................................................................................         2,765          2,050
                                                                                                          --------------------------
    TOTAL............................................................................................      $138,538        $96,074
                                                                                                          ==========================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable...................................................................................       $ 3,741        $ 4,303
  Notes payable......................................................................................            --          1,500
  Accrued expenses:
    Pension and profit sharing.......................................................................         2,140          3,984
    Income taxes.....................................................................................            --            468
    Payroll and commissions..........................................................................         2,810          2,426
    Other............................................................................................         1,017            521
                                                                                                          --------------------------
    Total current liabilities........................................................................         9,708         13,202
                                                                                                          --------------------------
ACCRUED PENSION COST.................................................................................         4,793          4,715
                                                                                                          --------------------------
DEFERRED INCOME TAXES................................................................................         2,900          2,066
                                                                                                          --------------------------
STOCKHOLDERS' EQUITY (See Note 14):
  Class A common stock--authorized 3,000,000 shares of $.01 par value each
    ($1.00 par value each at December 31, 1995); issued 1,772,025 shares.............................            18          1,772
  Common stock--authorized 20,000,000 shares of $.01 value each;
    issued--7,166,075 shares.........................................................................            72             --
  Additional paid-in capital.........................................................................        35,421            932
  Retained earnings..................................................................................        85,822         74,905
  Unrealized loss on investments (net of tax)........................................................           (62)           (60)
  Cumulative foreign currency translation adjustment.................................................           818           (506)
                                                                                                          --------------------------
    Total............................................................................................       122,089         77,043
                                                                                                          --------------------------
  Less cost of treasury stock--259,772 shares........................................................           952            952
                                                                                                          --------------------------
    Total stockholders' equity.......................................................................       121,137         76,091
                                                                                                          --------------------------
    TOTAL............................................................................................      $138,538        $96,074
====================================================================================================================================
</TABLE>

See the accompanying notes to the consolidated financial statements.

                                       14


<PAGE>


                        Statements of Consolidated Income
            (Dollars in thousands except share and per share amounts)
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,                                                             1996             1995            1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>              <C>             <C>
NET SALES.........................................................................         $160,323         $141,268        $121,470
COST OF PRODUCTS SOLD (Note 3)....................................................          111,027           96,190          83,128
                                                                                          ------------------------------------------
GROSS PROFIT......................................................................           49,296           45,078          38,342
OTHER EXPENSES:
  Selling expenses................................................................           16,347           14,867          13,634
  General and administrative expenses.............................................           11,830            9,189           8,208
                                                                                          ------------------------------------------
    TOTAL.........................................................................           28,177           24,056          21,842
                                                                                          ------------------------------------------
OPERATING PROFIT..................................................................           21,119           21,022          16,500
OTHER INCOME--NET.................................................................            1,003            1,099             627
                                                                                          ------------------------------------------
INCOME BEFORE INCOME TAXES........................................................           22,122           22,121          17,127
PROVISION FOR INCOME TAXES........................................................            8,264            8,323           6,686
                                                                                          ------------------------------------------
NET INCOME (Note 3)...............................................................         $ 13,858         $ 13,798        $ 10,441
                                                                                          ==========================================

NET INCOME PER SHARE (Note 14)....................................................           $ 1.79           $ 2.02          $ 1.53
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
  OUTSTANDING DURING THE YEAR (Note 14)...........................................        7,748,273        6,828,328       6,828,328
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See the accompanying notes to the consolidated financial statements.

                                       15


<PAGE>


           Statements of Changes in Consolidated Stockholders' Equity
                             (Dollars in thousands)
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Foreign
                                        Class A              Additional            Unrealized    Currency                  Total
For the years ended                     Common       Common   Paid-in   Retained     Loss on    Translation  Treasury  Stockholders'
December 31, 1996, 1995, and 1994        Stock       Stock    Capital   Earnings   Investments  Adjustment    Stock       Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                <C>                  <C>                   <C>       <C>                      <C>          <C>        <C>
Balance at January 1, 1994...........   $ 1,772               $  932    $56,683                  $ (616)      $(952)     $ 57,819
Net income...........................                                    10,441                                            10,441
Cash dividends declared--
  $.38125 per share..................                                    (2,603)                                           (2,603)
Reserve for unrealized
  investment loss....................                                                 (140)                                  (140)
Foreign currency translation
  adjustment.........................                                                               393                       393
                                       ---------------------------------------------------------------------------------------------
Balance at December 31, 1994.........     1,772                  932      64,521      (140)        (223)       (952)       65,910
Net income...........................                                     13,798                                           13,798
Cash dividends declared--
  $.50 per share.....................                                     (3,414)                                          (3,414)
Decrease in unrealized
  investment loss reserve............                                                   80                                     80
Foreign currency translation
  adjustment.........................                                                              (283)                     (283)
                                       ---------------------------------------------------------------------------------------------
Balance at December 31, 1995.........     1,772                  932      74,905       (60)        (506)       (952)       76,091
Net income...........................                                     13,858                                           13,858
Cash dividends declared--
  $.36875 per share..................                                     (2,888)                                          (2,888)
Reclassification of stock............    (1,754)               1,754                                                           --
Stock dividend declared..............                  53                    (53)                                              --
Stock offering--1,850,000
  shares issued......................                  19     32,735                                                       32,754
Increase in unrealized
  investment loss reserve............                                                   (2)                                    (2)
Foreign currency translation
  adjustment.........................                                                             1,324                     1,324
                                       ---------------------------------------------------------------------------------------------
Balance at December 31, 1996.........     $  18       $72    $35,421     $85,822     $ (62)       $ 818       $(952)     $121,137
                                       =============================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See the accompanying notes to the consolidated financial statements.

                                       16


<PAGE>

                      Statements of Consolidated Cash Flows
                             (Dollars in thousands)
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31,                                                                 1996           1995         1994
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                            <C>            <C>          <C>
  Net income.............................................................................      $  13,858      $ 13,798     $ 10,441
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation.........................................................................          5,343         4,165        3,425
    Loss (gain) on disposal of property..................................................             38            17           (2)
    Loss (gain) on disposal of investments...............................................             --           (41)          34
  Changes in assets and liabilities:
    (Increase) in accounts receivables...................................................         (7,735)         (786)      (4,718)
    (Increase) in refundable income taxes................................................           (246)           --           --
    (Increase) decrease in inventories...................................................         (7,258)       (2,638)       3,496
    (Increase) decrease in deferred income taxes--current................................            568           (62)           1
    (Increase) decrease in other current assets..........................................            432        (1,450)        (523)
    (Increase) in other assets...........................................................           (715)         (560)      (1,490)
    Increase (decrease) in accounts payable..............................................           (562)        1,553          385
    Increase (decrease) in accrued expenses..............................................         (1,432)          652          852
    Increase (decrease) in accrued pension costs.........................................             78          (655)         201
    Increase in deferred income taxes--noncurrent........................................            834           716          208
                                                                                              --------------------------------------
      Net cash provided by operating activities..........................................          3,203        14,709       12,310
                                                                                              --------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Property additions.....................................................................        (25,266)      (17,213)      (3,833)
  Additions to available-for-sale investments............................................            (14)           --       (1,479)
  Additions to held-to-maturity investments..............................................       (106,415)      (28,343)     (11,787)
  Proceeds from disposal of available-for-sale investments...............................            217         1,202        1,080
  Proceeds from disposal of held-to-maturity investments.................................        101,340        27,238       10,999
  Proceeds from disposal of property.....................................................             79             3           13
                                                                                              --------------------------------------
      Net cash used in investing activities..............................................        (30,059)      (17,113)      (5,007)
                                                                                              --------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net short-term (repayments) borrowings.................................................         (1,500)        1,500       (1,152)
  Issuance of common stock...............................................................         32,754            --           --
  Dividends paid.........................................................................         (2,888)       (3,414)      (2,603)
                                                                                              --------------------------------------
      Net cash provided by (used in) financing activities................................         28,366        (1,914)      (3,755)
                                                                                              --------------------------------------
  Effect of exchange rate changes on cash................................................          1,239          (329)         358
                                                                                              --------------------------------------
  Net increase (decrease) in cash and cash equivalents...................................          2,749        (4,647)       3,906
  Cash and cash equivalents at beginning of year.........................................          1,459         6,106        2,200
                                                                                              --------------------------------------
  Cash and cash equivalents at end of year...............................................      $   4,208      $  1,459     $  6,106
                                                                                              ======================================
SUPPLEMENTAL CASH FLOW DATA:
  Cash paid during the year for:
    Income taxes.........................................................................       $  7,429       $ 8,062     $  6,008
    Interest.............................................................................            218            10           66
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See the accompanying notes to the consolidated financial statements.


                                        17


<PAGE>


                   Notes to Consolidated Financial Statements
              For the years ended December 31, 1996, 1995, and 1994

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation

The consolidated financial statements of the Company include the accounts of
Penn Engineering & Manufacturing Corp. and its wholly owned subsidiaries, PEM
International Ltd., PEM International Singapore Pte. Ltd., PEM World Sales Ltd.,
PEM Investments, Inc., and PEM Management, Inc. All significant intercompany
transactions and balances are eliminated in consolidation.

b. Investments

The Company adopted as of January 1, 1994, the accounting and disclosure
requirements of the Statement of Financial Accounting Standards No. 115 (SFAS
No. 115), "Accounting for Certain Investments in Debt and Equity Securities"
(Note 2). Investments are classified as short-term if the maturities at December
31 are less than one year.

c. Inventories

The Company's domestic fastener inventories, are priced on the last-in,
first-out (LIFO) method, at the lower of cost or market. Other inventories,
representing approximately 69% and 70% of total inventories at December 31, 1996
and 1995, respectively, are priced on the first-in, first-out (FIFO) method, at
the lower of cost or market. As further discussed in Note 3, the Company changed
its method of accounting for its LIFO inventories from the unit cost method to
the components of cost method during 1996.

d. Property

Depreciation is calculated under the straight-line method over the estimated
useful lives of the respective assets, generally 3-5 years for tooling and
computer equipment, 10 years for furniture, fixtures, and machinery, and 25-40
years for buildings. Maintenance and repairs are charged to income and major
renewals and betterments are capitalized. At the time properties are retired or
sold, the cost and related accumulated depreciation are eliminated and any gain
or loss is included in income. In 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires review for possible impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The effect of the adoption was not material.

e. Income Taxes

The deferred tax provision is determined using the liability method. Under this
method, deferred tax assets and liabilities are recognized based on differences
between financial statement and tax bases of assets and liabilities using
presently enacted tax rates.

f. Statement of Consolidated Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on
deposit, cash in excess of daily requirements which is invested in overnight
repurchase agreements, and other interest bearing accounts withdrawable on a
daily basis.

g. Research and Development Costs

The Company expenses all research and development costs as incurred.

h. Foreign Currency Transactions

The effect of translating the financial statements of PEM International Ltd.
& PEM International Singapore Pte. Ltd. is recorded as a separate component
of Stockholders' Equity in the consolidated financial statements. All assets and
liabilities are translated at the year-end exchange rate while all income and
expense accounts are translated at the weighted average rate for the year.

i. 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 and 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.
Actual results could differ from those estimates.

j. Fair Values of Financial Instruments

Fair values of cash equivalents, short-term investments, trade receivables, and
payables approximate their carrying value. The estimated fair values of other
financial instruments have been determined using available market information
and valuation methodologies. These estimates require considerable judgment in
interpreting market data, and changes in assumptions or estimation methods may
significantly affect the fair value estimates.

k. Capital Stock

The Company's capital stock consists of $.01 par value Class A Common Stock and
$.01 par value Common Stock. Holders of Class A Common Stock have one vote per
share, while holders of Common Stock have no votes. All other rights of the
Class A Common Stock and Common Stock, including rights with respect to stock
splits, the consideration payable in a merger or consolidation, and distribution
upon liquidation, are the same.

l. Reclassifications

Certain reclassifications have been made to prior year amounts and balances to
conform with the 1996 presentation.

                                       18

<PAGE>



NOTE 2: INVESTMENTS

As discussed in Note 1 (b), the Company elected to adopt SFAS No. 115 effective
January 1, 1994. SFAS No. 115 requires the Company to account for debt and
equity securities as follows:

a) Trading--The Company holds no investments that were designated as trading
securities.

b) Held-to-Maturity--Securities that management has the positive intent and
ability to hold until maturity. These investments are carried at their remaining
unpaid principal balance net of any unamortized premiums or discounts. The
following is a summary of the net unpaid principal value of short-term held to
maturity securities at December 31, 1996 and 1995.

<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               1996          1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              (Dollars in thousands)
<S>                                                                                                            <C>          <C>
U.S. Treasury securities and securities of U.S. Government agencies..........................................  $8,303       $4,466
Commercial paper.............................................................................................   1,238           --
                                                                                                             -----------------------
  Total......................................................................................................  $9,541       $4,466
                                                                                                             =======================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

c) Available-for-Sale--Securities that will be held for indefinite periods of
time. These investments are carried at market value which is determined using
published quotes as of the close of business on December 31, 1996. Unrealized
gains and losses are excluded from earnings and are reported net of tax as a
separate component of equity until realized. Unrealized losses were $62,000, net
of taxes of $40,000, at December 31, 1996 and were $60,000, net of taxes of
$39,000, at December 31, 1995. The following is a summary of the estimated fair
value of the short-term available-for-sale securities at December 31, 1996 and
1995:
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               1996          1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              (Dollars in thousands)
<S>                                                                                                           <C>           <C>
Mutual Common Stock Funds.................................................................................... $  580        $  571
U.S. Government Security Income Fund.........................................................................    549           759
State and Municipal Bond Funds...............................................................................    188           192
                                                                                                             -----------------------
  Total...................................................................................................... $1,317        $1,522
                                                                                                             =======================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 3: INVENTORIES
At December 31, 1996 and 1995 inventories comprised:
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               1996        1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                            (Dollars in thousands)
<S>                                                                                                          <C>           <C>
Raw material................................................................................................ $ 4,470       $ 4,570
Tooling.....................................................................................................   3,882         3,610
Work-in-process.............................................................................................   7,648         6,512
Finished goods..............................................................................................  11,533         5,583
                                                                                                             -----------------------
  Total..................................................................................................... $27,533       $20,275
                                                                                                             =======================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

If the FIFO method of inventory valuation had been used for all inventories by
the Company, inventories at December 31, 1996, 1995, and 1994 would have been
$8,117,000, $8,028,000, and $7,642,000 higher and net income would have been
$56,000, $240,000, and $77,000 higher than reported for 1996, 1995, and 1994,
respectively.

A reduction in inventory quantities for the year ended December 31, 1994
resulted in the liquidation of LIFO inventory quantities carried at lower
manufacturing costs prevailing in prior years as compared with current year
manufacturing costs. The effect of such a reduction was to increase 1994 net
income by approximately $832,000.

In the fourth quarter of 1996, the Company changed the method of calculating its
domestic fastener LIFO inventory from the unit cost method to the components of
cost method. Management believes that this change in its LIFO method better
reflects the effect of inflation and results in a more representative LIFO cost
index for product mix changes. The effect of this change was to increase 1996
net income by $910,000 ($.12 per share). The cumulative effect of this
accounting change and the pro forma effect on prior years' income have not been
disclosed because such effects are not reasonably determinable.

Included in other assets is long-term tooling inventory totaling $2,765,000 and
$2,050,000 at December 31, 1996 and 1995, respectively.

                                       19
<PAGE>


             Notes to Consolidated Financial Statements (continued)
              For the years ended December 31, 1996, 1995, and 1994


NOTE 4: LINES OF CREDIT
At December 31, 1996, the Company had available unused short term lines of
credit totaling approximately $27,500,000. No amounts were outstanding under
these lines at December 31, 1996. Borrowings under these lines totaled
$1,500,000 at December 31, 1995 at an effective interest rate of 6.71%.

NOTE 5: PENSION AND PROFIT SHARING PLANS
The Company has a defined benefit pension plan covering substantially all
employees in the United States. The benefits are based on years of service and
the employee's earned compensation during any period of the highest 60
consecutive months occurring during the last ten years of employment. The
Company's policy is to fund at least the minimum pension payment required for
federal income tax qualification purposes. Plan provisions and funding meet the
requirements of the Employee Retirement Income Security Act of 1974.

The Company records pension costs in accordance with Statement of Financial
Accounting Standards No. 87, "Employers Accounting for Pensions." The total
pension expense for 1996, 1995 and 1994 was $2,348,000, $1,767,000, and
$1,860,000, respectively. The following table sets forth the plans' funded
status and amounts recognized in the Company's consolidated financial statements
for the years ended December 31, 1996 and 1995:

<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              1996        1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           (Dollars in thousands)
<S>                                                                                                         <C>         <C>
Actuarial present value of benefit obligations:
Vested employees........................................................................................... $ 13,563    $ 13,301
Non-vested employees.......................................................................................      379         365
                                                                                                            ------------------------
  Total.................................................................................................... $ 13,942    $ 13,666
                                                                                                            ========================
Projected plan benefit obligation for services rendered to date............................................ $ 24,937    $ 24,807
Plan assets at fair value (primarily listed stocks, bonds and cash equivalents)............................  (20,324)    (17,230)
                                                                                                            ------------------------
Excess of projected benefit obligation over plan assets....................................................    4,613       7,577
Unrecognized net (gain) from past experience different from that assumed and effects
  of changes in assumptions ...............................................................................     (136)     (2,494)
Unrecognized net asset at January 1, 1987 being recognized over 15 years...................................      316         380
                                                                                                            ------------------------
Total accrued pension cost................................................................................. $  4,793    $  5,463
                                                                                                            ========================
  Current pension cost payable............................................................................. $      0    $    748
  Accrued pension cost--noncurrent..........................................................................$  4,793    $  4,715
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Net pension cost for 1996, 1995, and 1994 included the following components:
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     1996         1995        1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        (Dollars in thousands)
<S>                                                                                                <C>          <C>         <C>
Service cost--benefits earned during the period................................................    $ 2,081      $ 1,426     $ 1,586
Interest cost on projected benefit obligation..................................................      1,756        1,435       1,339
Actual return on plan assets...................................................................     (1,581)      (3,261)        355
Net amortization and deferral..................................................................         51        2,132      (1,450)
                                                                                                   ---------------------------------
Net periodic pension cost......................................................................    $ 2,307      $ 1,732     $ 1,830
                                                                                                   =================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The assumed discount rate, rate of increase in long-term compensation levels,
and expected long-term rate of return on assets were 7.5% (7% in 1995 and 8% in
1994), 6%, and 8%, respectively. The increase in the discount rate from 7% in
1995 to 7.5% in 1996 caused a decrease in the projected benefit obligation of
approximately $2,693,000. The decrease in the discount rate from 8% in 1994 to
7% in 1995 caused an increase in the projected benefit obligation of
approximately $4,630,000.

The Company has profit sharing plans covering all eligible employees in the
United States. Contributions and costs are determined as the lesser of 25% of
income before income taxes and profit sharing cost or 10% of each covered
employee's salary, and totaled $3,631,000 in 1996, $3,225,000 in 1995, and
$3,043,000 in 1994.

NOTE 6: STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company currently has one stock option plan, the 1996 Equity Incentive Plan
(the "Plan"). The Plan provides for the granting of options to eligible
employees of all participating subsidiaries of the Company. The Plan permits the
granting of both options that qualify as incentive stock options under Section
422(b) of the Internal Revenue Code of 1986 (the "Code") and options that do not
qualify as incentive stock options under the Code (Non-Qualified Stock Options).
The Company is authorized under the Plan to grant options for shares not to
exceed in the aggregate 500,000 shares of the Company's non-voting Common Stock.
The Plan provides for the granting of both


                                       20

<PAGE>

types of options with an exercise price equal to the greater of par value or
the closing market price of the Company's non-voting Common Stock on the date
of the grant and a maximum term of ten years. All options granted under this
Plan shall vest in four equal cumulative installments commencing on the first,
second, third, and fourth anniversaries of the grant date of the option. The
Company had no options outstanding at the beginning of the year and had granted
approximately 133,300 options as of December 31, 1996, all of which are
currently unexercisable, with an aggregate fair market value of approximately
$784,000. The grant date and exercise price of the initial grant under the Plan
were December 4, 1996 and $18.375 per share, respectively. The fair value of
each option granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk free interest rate of
5.93%; dividend yield of 2.25% for all years; expected life of 6 years; and
volatility of 30%.

The Company also has one stock purchase plan, the 1996 Employee Stock Purchase
Plan (the "Purchase Plan") which provides for the purchase of the Company's
non-voting Common Stock by eligible employees of all participating subsidiaries
of the Company. The Purchase Plan commenced on October 1, 1996 and has a term of
ten years with 20 semi-annual subscription periods. During its term the Purchase
Plan permits employees to purchase the Company's non-voting Common Stock on a
regular basis, through payroll deductions not exceeding 10% of base wages, at a
10% discount from the lowest of the market price on the last trading day before
the first day of enrollment period with respect to the subscription period or on
the last trading day of such subscription period. The maximum number of shares
to be issued under the Purchase Plan is 150,000 shares of the Company's
non-voting Common Stock. Shares under the Purchase Plan are subscribed during
each subscription period and purchased on the last business day of such
subscription period. The Company had no shares subscribed for at the beginning
of the year and had collected approximately $68,400 for the initial subscription
period at December 31, 1996. The Company utilized the same valuation assumptions
in this plan as it had in the stock option plan.

Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
which requires expanded disclosures of stock-based compensation arrangements
with employees. SFAS 123 encourages, but does not require, compensation cost to
be measured based on the fair value of the equity instrument awarded. It allows
the Company to continue to measure compensation cost for these plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to recognize compensation cost based on the
intrinsic value of the equity instrument awarded as promulgated in APB No. 25.
Had compensation costs for 1996 for the Company's plans been determined based on
the fair value at the grant date for awards under these plans consistent with
the method of SFAS No. 123, there would have been no material effect on the
Company's financial position or results of its operations.

NOTE 7: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company hedges the potential effect of currency fluctuations on foreign
operating activities by entering into foreign currency forward contracts. Gains
or losses on qualifying hedges of firm commitments are recognized in income when
the hedged transaction occurs. Forward contracts that do not qualify for hedge
accounting are marked to market, and the resulting gains or losses are reflected
in income. Total foreign currency transaction gains (losses) of ($224,000),
$174,000, and $109,000 were recorded in 1996, 1995, and 1994, respectively. The
forward contracts outstanding at December 31, 1996 mature in 1997 and require
the Company to exchange foreign currency for U.S. dollars at maturity. The
Company had foreign exchange contracts of $13.9 million outstanding at December
31, 1996 with a fair market value of approximately $12.7 million. At December
31, 1995 there were $9.4 million foreign exchange contacts outstanding with a
fair market value which approximated cost. The fair value of these foreign
exchange contracts is the amount the Company would receive or pay to terminate
the contracts using quoted market rates.

NOTE 8: INCOME TAXES
The income tax provision consists of the following:

<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     1996         1995        1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        (Dollars in thousands)
Current:
<S>                                                                                                 <C>          <C>          <C>
  Federal........................................................................................   $6,239       $6,837       $5,234
  State..........................................................................................      644          863        1,303
                                                                                                    --------------------------------
    Total current tax provision..................................................................    6,883        7,700        6,537
                                                                                                    --------------------------------
Deferred:
  Federal........................................................................................    1,236          553          133
  State..........................................................................................      145           70           16
                                                                                                    --------------------------------
    Total deferred tax...........................................................................    1,381          623          149
                                                                                                    --------------------------------
Total income tax provision.......................................................................   $8,264       $8,323       $6,686
                                                                                                    ================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       21


<PAGE>



             Notes to Consolidated Financial Statements (continued)
              For the years ended December 31, 1996, 1995, and 1994

The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                1996         1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             (Dollars in thousands)
Deferred tax assets:
<S>                                                                                                            <C>          <C>
  Pension..................................................................................................... $1,871       $1,854
  Allowance for doubtful accounts.............................................................................    382          346
  Inventory...................................................................................................    378          343
  Other.......................................................................................................    341          290
                                                                                                               ---------------------
    Total deferred tax asset..................................................................................  2,972        2,833
                                                                                                               ---------------------
Deferred tax liabilities:
  Property....................................................................................................  4,771        3,847
  LIFO reserve................................................................................................    592           --
  Other.......................................................................................................    118           93
                                                                                                               ---------------------
    Total deferred tax liability..............................................................................  5,481        3,940
                                                                                                               ---------------------
Net deferred tax liability.................................................................................... $2,509       $1,107
                                                                                                               =====================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

A reconciliation between the provision for income taxes, computed by applying
the statutory federal income tax rate to income before taxes, and the actual
provision for income taxes on such income is as follows:

<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     1996         1995        1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        (Dollars in thousands)
<S>                                                                                                 <C>          <C>         <C>
Federal income tax provision at statutory rate.................................................     $7,743       $7,742      $5,958
State income taxes, after deducting federal income tax benefit.................................        513          606         860
Interest and dividend income excluded from taxable income......................................         (2)         (23)        (24)
Other..........................................................................................         10           (2)        108
                                                                                                    --------------------------------
Actual provision for income taxes..............................................................     $8,264       $8,323      $6,686
                                                                                                    ================================
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

NOTE 9: CERTAIN TRANSACTIONS
The Company sold fasteners at standard authorized distributor prices to a
corporation, an officer and director of which is also a director of the Company,
in the amounts of $6,512,000, $7,932,000, and $7,061,000 and made purchases from
this party in the amounts of $289,000, $320,000, and $356,000 in 1996, 1995, and
1994, respectively. At December 31, 1995 the Company had a trade receivable
balance due from this party in the amount of $778,000. In November, 1996 this
corporation was sold to an unrelated party.

NOTE 10: COMMITMENTS
The Company has operating leases covering certain automobiles, office space, and
office equipment. The future minimum annual payments on these non-cancelable
operating leases which were in effect at December 31, 1996, having initial or
remaining terms of more than one year are $546,000 for 1997, $498,000 for 1998,
$114,000 for 1999 and $0 for 2000 and 2001, respectively.

Rental and operating lease expenses charged against earnings were $586,000,
$429,000, and $374,000 in 1996, 1995, and 1994 respectively.

NOTE 11: CONTINGENCIES
The Company is exposed to asserted and unasserted potential claims encountered
in the normal course of business. Based on the advice of legal counsel,
management believes that the final resolution of these matters will not
materially affect the Company's consolidated financial position or results of
operations.

                                       22

<PAGE>


NOTE 12: FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY
Information about the operations of the Company in different industry segments
for 1996, 1995, and 1994 follows:
<TABLE>

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996                                                                Fasteners     Motors       Consolidated
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  (Dollars in thousands)
<S>                                                                                          <C>          <C>            <C>
Net sales..............................................................................      $130,721     $29,602        $160,323
                                                                                            ----------------------------------------
Operating profit.......................................................................        18,754       2,365        $ 21,119
Other income...........................................................................                                     1,003
                                                                                                                         -----------
Income before income taxes.............................................................                                  $ 22,122
                                                                                                                         ===========

Identifiable assets....................................................................      $110,999     $14,899        $125,898
Corporate assets.......................................................................                                    12,640
                                                                                                                         -----------
Total assets at December 31, 1996......................................................                                  $138,538
                                                                                                                         ===========

Depreciation...........................................................................      $  4,815     $   528        $  5,343
Capital expenditures...................................................................      $ 24,083     $ 1,183        $ 25,266
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995                                                                Fasteners     Motors       Consolidated
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  (Dollars in thousands)
Net sales..............................................................................      $113,323     $27,945        $141,268
                                                                                            ----------------------------------------
Operating profit.......................................................................      $ 18,353     $ 2,669        $ 21,022
Other income...........................................................................                                     1,099
                                                                                                                         -----------
Income before income taxes.............................................................                                  $ 22,121
                                                                                                                         ===========

Identifiable assets....................................................................      $ 74,328     $13,654        $ 87,982
Corporate assets.......................................................................                                     8,092
                                                                                                                         -----------
Total assets at December 31, 1995......................................................                                  $ 96,074
                                                                                                                         ===========

Depreciation...........................................................................      $  3,686      $  479        $  4,165
Capital expenditures...................................................................      $ 16,464      $  749        $ 17,213
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994                                                                Fasteners     Motors       Consolidated
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  (Dollars in thousands)
Net sales..............................................................................      $ 96,067     $25,403        $121,470
                                                                                            ----------------------------------------
Operating profit.......................................................................      $ 14,152     $ 2,348        $ 16,500
Other income...........................................................................                                       627
                                                                                                                         -----------
Income before income taxes.............................................................                                  $ 17,127
                                                                                                                         ===========

Identifiable assets....................................................................      $ 61,490     $12,684        $ 74,174
Corporate assets.......................................................................                                     7,953
                                                                                                                         -----------
Total assets at December 31, 1994......................................................                                  $ 82,127
                                                                                                                         ===========

Depreciation...........................................................................       $ 2,932      $  493         $ 3,425
Capital expenditures...................................................................       $ 3,307      $  526         $ 3,833
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Company operates in two business segments, fastener products and electric
motors. Operating profit is net sales less costs and expenses. Identifiable
assets by segment are those assets that are used in the Company's operations in
each segment. Sales of fasteners to one customer (an authorized distributor of
the Company) totaled approximately $21,830,000, $20,854,000, and $16,554,00 for
the years ended December 31, 1996, 1995, and 1994, respectively (approximately
14%, 15%, and 14% of consolidated net sales in 1996, 1995, and 1994,
respectively).

Sales of PEM International Ltd. and PEM International Singapore Pte. Ltd., (the
"Foreign Subsidiaries") totaled approximately $30,989,000, $22,852,000, and
$17,374,000 for the years ended December 31, 1996, 1995, and 1994, respectively
(approximately 19%, 16%, and 14% of consolidated net sales in 1996, 1995, and
1994, respectively). Sales from the parent Company to the Foreign Subsidiaries
result in profit margins which are representative of those obtained from sales
to unaffiliated distributors. Income (loss) before taxes of the Foreign
Subsidiaries

                                       23

<PAGE>


             Notes to Consolidated Financial Statements (continued)
              For the years ended December 31, 1996, 1995, and 1994

totaled $989,000, $605,000, and ($17,000) for the years ended December 31,
1996, 1995, and 1994, respectively. Assets of the Foreign Subsidiaries
represented approximately 17%, and 12% of consolidated total assets as of
December 31, 1996, and 1995, respectively. Export sales, other than to the
Foreign Subsidiaries totaled approximately $9,694,000, $12,585,000, and
$10,118,000 for the years ended December 31, 1996, 1995, and 1994, respectively,
(approximately 6%, 9%, and 8% of consolidated net sales in 1996, 1995, and 1994,
respectively).

NOTE 13: ACQUISITIONS
On March 1, 1996 the Company purchased, for approximately $2,900,000, certain
inventory and other assets from a former authorized distributor and created a
new wholly-owned subsidiary. This new, wholly-owned subsidiary, PEM
International Singapore Pte. Ltd., operates similar to the Company's other
wholly-owned subsidiary, PEM International Ltd.

NOTE 14: STOCK RECLASSIFICATION AND STOCK DIVIDEND
On May 22, 1996, the Company effected a reclassification of its common stock
whereby each share of existing $1.00 par value voting common stock became one
share of new $.01 par value Class A voting common stock (the "Stock
Reclassification"). On May 23, 1996, the Company effected a 4-for-1 stock split,
in the form of a stock dividend, payable in shares of $.01 par value non-voting
common stock to stockholders of record on May 3, 1996 (the "Stock Dividend").
The change in par value of the Class A common stock as a result of the Stock
Reclassification resulted in the transfer of $1,754,305 from Class A common
stock to additional paid-in capital, and the Stock Dividend resulted in the
issuance of 5,316,075 new common shares and in the transfer of $53,161 from
retained earnings to common stock. In the foregoing consolidated financial
statements, all per share amounts and number of shares have been restated to
reflect the Stock Reclassification and the Stock Dividend.


                                Auditors' Report


To the Stockholders and Board of Directors of
Penn Engineering & Manufacturing Corp.
Danboro, Pennsylvania


We have audited the accompanying consolidated balance sheets of Penn Engineering
& Manufacturing Corp. and subsidiaries (the "Company") as of December 31, 1996
and 1995 and the related statements of consolidated income, changes in
consolidated stockholders' equity and consolidated cash flows for each of the
three years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, during 1996 the
Company changed its method of accounting for last-in, first-out inventories.




/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
January 29, 1997

                                       24

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