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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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|ý                                              | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|---------------------------------------------- | ----------------------------------------------------------------------------------------
|For the Fiscal Year Ended December 31, 2001
or
|o                                              | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1 - 5332

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P & F INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

|Delaware                                                       |  | 22-1657413                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|300 Smith Street, Farmingdale, New York                        |  | 11735                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrant's telephone number, including area code:(631) 694-1800

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

None

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

Class A Common Stock, $1.00 par value

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

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

The
aggregate market value of the registrant's Class A Common Stock held by non-affiliates of the registrant, based on the last sale price on March 28, 2002,
was approximately $15,568,000.

As
of March 28, 2002, there were 3,504,148 shares of the registrant's Class A Common Stock outstanding.

Documents Incorporated by Reference

Part III of this Annual Report on Form 10-K incorporates by reference information from the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held during 2002.

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P & F INDUSTRIES, INC.    FORM 10-K  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

TABLE OF CONTENTS

|         |  |                                                                                       |  | Page 
|-------- |  | ------------------------------------------------------------------------------------- |  | -----
|PART I   |  |                                                                                       |  |      
|Item 1.  |  | Business                                                                              |  | 1-4  
|Item 2.  |  | Properties                                                                            |  | 4    
|Item 3.  |  | Legal Proceedings                                                                     |  | 4    
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 4    
|PART II  |  |                                                                                       |  |      
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 4    
|Item 6.  |  | Selected Financial Data                                                               |  | 5    
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 6-11 
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 11   
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 12-32
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  | 33   
|PART III |  |                                                                                       |  |      
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 33   
|Item 11. |  | Executive Compensation                                                                |  | 33   
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 33   
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 33   
|PART IV  |  |                                                                                       |  |      
|Item 14. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 34-35
|         |  | Signatures                                                                            |  | 36   
|         |  | Exhibit Index                                                                         |  | 37-38

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SAFE HARBOR STATEMENT  UNDER THE PRIVATE SECURITIES  LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Any forward-looking statements contained herein, including those related to the Company's future performance, are based upon the Company's historical performance and on current plans, estimates
and expectations. They are subject to various risks and uncertainties, including, but not limited to, the impact of competition, product demand and pricing. These risks could cause the Company's
actual results for the 2002 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Forward-looking statements speak only
as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments
or otherwise.

ii

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PART I

Item 1.    Business

P & F Industries, Inc. conducts business operations through its three wholly-owned subsidiaries: Florida Pneumatic Manufacturing Corporation
("Florida Pneumatic"), Green Manufacturing, Inc. ("Green") and Embassy Industries, Inc. ("Embassy"). P & F Industries, Inc. and its subsidiaries are herein referred to
collectively as the "Company".

Florida
Pneumatic is engaged in the importation, manufacture and sale of pneumatic hand tools, primarily for the industrial and retail markets, and the importation and sale of compressor
air filters. FloriPneumatic also markets, through its Berkley Tool division ("Berkley"), a line of pipe cutting and threading tools, wrenches and replacement electrical components for a
widely-used brand of pipe cutting and threading machines. Green is engaged primarily in the manufacture, development and sale of heavy-duty welded custom designed hydraulic
cylinders. Green also manufactures a line of access equipment for the petro-chemical industry and a line of post hole digging equipment for the agricultural industry. Embassy is engaged in the
manufacture and sale of baseboard heating products and the importation and sale of radiant heating systems. Embassy also imports a line of door and window hardware items through its Franklin hardware
division ("Franklin"). Note 9 of the Notes to Consolidated Financial Statements presents financial information for the segments of the Company's business.

Florida
Pneumatic has one major customer, Sears, Roebuck and Co., that accounted for 21.4%, 23.4% and 24.7%, of consolidated revenues for the years ended December 31, 2001, 2000
and 1999, respectively. The Home Depot, Inc. is a customer of both Florida Pneumatic and Franklin, and accounted for 18.0%, 14.0% and 10.1% of consolidated revenues for the years ended
December 31, 2001, 2000 and 1999, respectively. Revenues derived from countries outside of the United States were immaterial for the years ended December 31, 2001, 2000 and 1999.

Florida Pneumatic

Florida Pneumatic imports or manufactures approximately fifty types of pneumatic hand tools, most of which are sold at prices ranging from $50 to $1,000, under
the names "Florida Pneumatic" and "Universal Tool", as well as under the trade names or trademarks of several private label customers. This line of products includes sanders, grinders, drills, saws
and impact wrenches. These tools are similar in appearance and function to electric hand tools but are powered by compressed air, rather than directly by electricity. Air tools, as they are also
called, are generally less expensive to operate, offer better performance and are weigh less than their electrical counterparts.

Most
of Florida Pneumatic's sales are of pneumatic tools imported from Japan and Taiwan, along with sales of some products imported from mainland China. Florida Pneumatic manufactures
high speed rotary and reciprocating pneumatic tools at its factory in Jupiter, Florida and imports air filters.

Florida
Pneumatic's products are sold to distributors, retailers and private label customers through in-house sales personnel and manufacturers' representatives. Typical
users of Florida Pneumatic's hand tools include industrial maintenance and production staffs, do-it-yourself mechanics, automobile mechanics and auto body repairmen.

Berkley
markets a product line consisting of pipe and bolt dies, pipe taps, pipe and tubing cutter wheels and replacement electrical components for a widely-used brand of
pipe cutting and threading machines. Florida Pneumatic markets Berkley's products through industrial distributors and contractors.

The
primary competitive factors in the pneumatic tool market are price, service and brand-name awareness.

1

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Three
customers accounted for 37.4%,42.2% and 43.8%, 26.9%, 21.4% and 14.7%, and 12.9%, 13.4% and 13.6%, respectively, of Florida
Pneumatic's revenues for the years ended December 31, 2001, 2000 and 1999, respectively.

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

Florida
Pneumatic purchases significant amounts of pneumatic tools from two foreign suppliers. Although other sources are available, the loss of either supplier could adversely affect
operating results.

Green

Green is engaged primarily in the manufacture, development and sale of heavy-duty welded custom designed hydraulic cylinders. All of Green's hydraulic
cylinders are sold for use as integrated components on a variety of equipment and machinery manufactured by others. Hydraulic cylinders are welded casings whose internal chambers consist of a rod and
piston surrounded by a petroleum-based fluid. The casings contain openings or valves which allow the introduction of fluid into one side of the chamber at high pressure. The introduction of fluid
causes the rod/piston to move with tremendous force and allows for the pushing or lifting of extremely heavy loads.

Green's
products, which are sold throughout the United States, are used on tow trucks and car carriers for hoisting and lifting cars and on aerial lifts and cranes to raise platforms and
other heavy objects. The cylinders are also used on various types of construction equipment for digging and as steering mechanisms. They are also installed in compacting equipment as the means to
compress recyclable cardboard or other refuse.

Green
specializes in cylinders that range in bore size from 1 to 8 inches and stroke, or extend, up to 180 inches. Each cylinder is engineered to the customer's specifications.

Green
sells its products directly to OEM customers, at prices ranging from $50 to $1,500, with an approximate average selling price of $150.

The
primary competitive factors in the hydraulic cylinder industry are quality and timely delivery.

Green
also manufactures a line of access equipment for the petro-chemical and bulk storage industries. This product line, which accounts for approximately 15% of Green's revenues,
consists of bridges, platforms, walkways and stairways, constructed of steel or aluminum and generally installed outdoors. These products are designed to customers' specifications and are sold for use
in overhead and elevated access to large containers, including rail cars and storage tanks.

Green
also markets a small line of diggers used primarily as attachments to small tractors for light farm work. This product line, which accounts for approximately 7% of Green's
revenues, is marketed through farm equipment dealers and wholesalers.

Green's
cylinder business is not seasonal, but revenues from agricultural equipment are stronger during the growing season. Backlogs totaling as much as 20% to 25% of yearly sales are
standard for the cylinder business.

One
customer accounted for 26.0%, 24.9% and 22.6% of Green's revenues for the years ended December 31, 2001, 2000 and 1999, respectively. This customer ceased being a customer of
the Company during the first quarter of 2002. Sales to this customer during the year ended December 31, 2001 were approximately $3,750,000.

Green
purchases significant amounts of raw materials from one supplier. Other sources are available, however, and the Company believes that the loss of this supplier would not adversely
affect operating results.

2

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Embassy

Embassy's baseboard heating products are sold nationally, under the Embassy name and under its Panel-Track and System 6 trademarks, for use in
hot-water heating systems installed in single family homes, multi-unit dwellings and commercial and industrial buildings. Embassy's products are sold principally to wholesalers
by manufacturers' representatives and in-house sales support personnel. Embassy's products are also sold to other manufacturers for incorporation into their products and for distribution
on a private-label basis.

Hot-water
heating systems operate by heating water in a boiler and circulating it through the copper tubing in the baseboard along the perimeter of the space to be heated.
Attached to the copper tubing are numerous closely-spaced aluminum fins which dissipate the heat. Sections are two to ten feet in length, project several inches from the wall and rise less than a foot
from the floor. These sections may be combined for longer installations. Embassy's baseboard contains patented plastic tracks which ease handling and reduce operating noise.

Embassy
also imports a line of radiant heating systems. These systems are different from baseboard heating systems in that the radiant heating systems radiate heat provided by hot water
circulating through plastic tubing, which is generally installed beneath the surface of the floor. These systems include the tubing, manifolds, controls and installation supplies. Embassy also
provides computer software which aids in the design of the system. Sales of this product accounted for approximately 20.7%,16.5% and 15.4% of Embassy's
total heating equipment revenues for the years ended December 31, 2001, 2000 and 1999, respectively. No customer accounted for 10% of Embassy's revenues for the years ended December 31,
2001, 2000 or 1999.

Baseboard
and radiant heating systems compete with forced hot-air and electric heating systems. Forced hot-air systems are noisier than baseboard and radiant
heating systems, sometimes cause discomfort from fluctuations in temperature as the furnace cycles on and off, and do not distribute warm air uniformly within the room. Electric heating systems are
generally more expensive to operate than baseboard and radiant heating systems. Radiant heating systems are generally the most expensive of these systems to install and therefore tend to be installed
more often in custom and higher priced homes. Because Embassy's products are used primarily in new installations, its sales are related to housing starts.

The
primary competitive factors in the baseboard and radiant heating market are quality, price, service and brand-name awareness.

Embassy's
baseboard heating products are sold off the shelf, and no material backlog of orders exists. Raw materials are readily available. The business is seasonal, with approximately
58% of Embassy's heating equipment revenues coming in the last six months of the year.

Franklin
imports and packages approximately 225 types of hardware products, including locksets, deadbolts, door and window security hardware, rope-related hardware products
and fire escape ladders. Franklin's products generally range in price from under $1.00 to $30.00 and are sold to retailers, wholesalers and private label accounts through manufacturers'
representatives and in-house sales support personnel. Nearly all of Franklin's sales are of products imported from the Far East. Two customers accounted for approximately 38.0%, 31.5% and
26.5%, and 27.4%, 23.9% and 19.6%, respectively, of Franklin's revenues for the years ended December 31, 2001, 2000 and 1999, respectively. One former customer, which accounted for
approximately 14.0% and 14.1% of Franklin's revenues for the years ended December 31, 2000 and 1999, respectively, has filed for bankruptcy.

The
primary competitive factors in the hardware business are price, service, skill in packaging and point-of-sale marketing.

3

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Franklin's
products are sold off the shelf, and no material backlog of orders exists. Sources of imported products are readily available. Franklin's business is not seasonal.

Employees

The Company employed 305 persons as of December 31, 2001, including 5 at corporate headquarters. Florida Pneumatic had 80 employees and Green had 127
employees. These employees are not represented by a union. Embassy had 93 employees, including 63 factory workers who are covered by a single-employer union contract, which expires on
November 30, 2004. The Company believes that its relationships with its employees are satisfactory.

Item 2.    Properties

Florida Pneumatic, Green and Embassy each own the plant facilities that they occupy. The facilities owned by Florida Pneumatic and Embassy are subject to
mortgages. Florida Pneumatic's 72,000 square foot plant facility is located in Jupiter, Florida. Green's 85,000 square foot plant facility is located in Bowling Green, Ohio. Embassy's 75,000 square
foot plant facility is located in Farmingdale, New York. Each facility either provides adequate space for the operations of the respective subsidiary in the foreseeable future, or can be expanded to
provide additional space. The Company's executive offices are located in Embassy's facility in Farmingdale, New York.

Item 3.    Legal Proceedings

The Company is a defendant or co-defendant in various actions brought about in the course of conducting its business. The Company has accrued
approximately $400,000 for possible liability relating to these actions.

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

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

PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters

The Company's Class A Common Stock trades on The Nasdaq Stock Market. The range of high and low bid information for the Company's Class A Common
Stock during the last two fiscal years was as follows:

2001

High

LowFirst Quarter

$
7.88

$
5.44Second Quarter


7.18


6.06Third Quarter


6.92


5.50Fourth Quarter


8.00


5.65


2000

High

LowFirst Quarter

$
13.00

$
5.94Second Quarter


9.06


6.56Third Quarter


8.50


6.50Fourth Quarter


7.37


4.94


Such
over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

4

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As
of March 28, 2002, there were approximately 1,400 holders of record of the Company's Class A Common Stock.

The
Company has not declared any cash dividends on its Class A Common Stock since its incorporation in 1962 and has no plans to declare any cash dividends in the foreseeable
future.

Item 6.    Selected Financial Data

P & F INDUSTRIES, INC. AND SUBSIDIARIES    SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data has been derived from the audited consolidated financial statements of P & F Industries, Inc. and
subsidiaries. The selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Annual Report on
Form 10-K.

|                                                             |         | Year ended December 31,
|------------------------------------------------------------ | ------- | -----------------------
|
|Revenues                                                     |         | $                      
|                                                             |         |                        
|Income from continuing operations                            |         | $                      
|                                                             |         |                        
|Income from continuing operations per share of common stock: |         |                        
|                                                             | Basic   |                        
|                                                             |         |                        
|                                                             | Diluted |                        
|                                                             |         |                        
|Total Assets                                                 |         | $                      
|                                                             |         |                        
|Long-term obligations, less current maturities               |         | $                      
|                                                             |         |                        
|Cash dividends declared per common share                     |         | $                      
|                                                             |         |                        

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

General

Critical Accounting Policies and Estimates

Note 1 of the Notes to Consolidated Financial Statements, included elsewhere in this Annual Report on Form 10-K, includes a summary of
the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United
States. Certain of these accounting policies require the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an ongoing basis, the Company evaluates estimates, including those related to income taxes, bad debts, inventory reserves, intangible assets and contingencies.
The Company bases it estimates on historical data, when available, experience, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The
Company's critical accounting policies include:



The Company records revenues upon shipment with related risks and title passing to the customers. Estimates of losses for bad debts, returns and other allowances
are recorded at the time of the sale.
Shipping charges to customers and related expenses that are included in selling, general and administrative expenses are immaterial.



The Company's operational policy for the assessment and measurement of any impairment in the value of excess of cost over net assets acquired that is other than
temporary is to evaluate the recoverability and remaining life of its goodwill and determine whether the goodwill should be completely or partially written off. The Company will recognize an
impairment of goodwill if the fair value of the goodwill is deemed to be less than its carrying value. If the Company determines that goodwill has been impaired, the Company will reflect the
impairment through a reduction in the carrying value of goodwill, in an amount equal to the excess of the carrying amount of the goodwill over the amount of the undiscounted estimated operating cash
flows.

Results of Operations

2001 Compared to 2000

Consolidated revenues decreased 16.9%, from $80,898,674 to $67,195,912. Revenues from pneumatic tools and related equipment decreased 14.5%, from $44,872,344 to
$38,359,690, due primarily to a decrease in special promotions by a significant customer, as well as to the overall weakness caused by the economic slowdown. The selling prices of pneumatic tools and
related equipment were unchanged during the year.

Revenues
from hydraulic cylinders and other equipment decreased 28.9%, from $20,219,885 to $14,377,036, due primarily to three major factors. First, one large aerial lift customer
discontinued selling a significant portion of its product line. Second, weakness in demand for both recycled cardboard and large capital goods reduced demand for cylinders sold to the refuse market.
Third, overall weakness in demand for capital goods reduced demand for cylinders sold to the wrecker market. Selling prices of hydraulic cylinders and other equipment were increased by approximately
5%

6

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to a majority of customers during the fourth quarter of 2000, and were maintained at that level during 2001.

Revenues
from heating equipment decreased 4.6%, from $10,256,599 to $9,785,582, due primarily to weak sales of baseboard products and the loss of a significant customer, which was
partially offset by sales of the new boiler product and an increase in sales of radiant products. Average selling prices for all heating equipment products were unchanged during the year.

Revenues
from hardware products decreased 15.8%, from $5,549,846 to $4,673,604, due primarily to the loss of two significant customers who declared bankruptcy since the third quarter of
2000. This was partially offset by the addition of a significant new customer in the second half of 2001. Selling prices of hardware products were unchanged during the year.

Consolidated
gross profit, as a percentage of revenues, decreased from 30.5% to 30.0%. Gross profit from pneumatic tools and related equipment was unchanged at 36.8%. Gross profit from
hydraulic cylinders and other equipment decreased from 14.2% to 9.9%, due primarily to the decrease in revenues, which reduced coverage of fixed expenses, as well as to the production of prototypes
and short-run orders for potential new customers, which require significant labor resources while generating minimal profit margins. Gross profit from heating equipment decreased from
36.6% to 34.0%, due to a shift in product mix, as well as to lower production activity, which resulted in lower absorption of fixed expenses. Gross profit from hardware products decreased from 28.0%
to 27.8%, due primarily to a change in product mix.

Consolidated
selling, general and administrative expenses decreased 4.1%, from $17,199,793 to $16,492,976, due primarily to the overall decrease in revenues. As a percentage of revenues,
selling, general and administrative expenses increased from 21.3% to 24.5%, due primarily to the decrease in revenues.

Interest
expense decreased 42.7%, from $1,390,949 to $796,663, due primarily to decreases in both the average outstanding balance of the Company's borrowings and the average interest
rate on these borrowings.

The
effective tax rates for the years ended December 31, 2001 and 2000 were 36.9% and 37.2% respectively. See Note 7 of the Notes to Consolidated Financial Statements.

2000 Compared to 1999

Consolidated revenues decreased 2.2%, from $82,700,440 to $80,898,674. Revenues from pneumatic tools and related equipment decreased 3.9%, from $46,708,679 to
$44,872,344, due primarily to the non-recurrence of shipments to one large customer for special sales promotions by that customer. The selling prices of pneumatic tools and related
equipment were unchanged during the year.

Revenues
from hydraulic cylinders and other equipment decreased 1.9%, from $20,611,682 to $20,219,885, due primarily to a plant shutdown at a significant customer in the fourth quarter
of 2000. Selling prices of hydraulic cylinders and other equipment were increased by approximately 5% to a majority of customers during the fourth quarter of 2000.

Revenues
from heating equipment increased 4.2%, from $9,843,257 to $10,256,599, due primarily to a 12% increase in radiant sales and a 3% increase in baseboard sales to a broad range of
customers. Average selling prices for all heating equipment products were unchanged during the year.

Revenues
from hardware products increased slightly, from $5,536,822 to $5,549,846. Selling prices of hardware products were unchanged during the year.

Consolidated
gross profit, as a percentage of revenues, decreased from 30.9% to 30.5%. Gross profit from pneumatic tools and related equipment decreased from 37.5% to 36.8%, due to a
less

7

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favorable exchange rate of the dollar compared to the Japanese yen, which increased the cost of imported product. Gross profit from hydraulic cylinders and other equipment decreased from 14.6% to
14.2%, due primarily to a significant across-the-board wage increase to factory employees that was implemented during the third quarter of 2000. Gross profit from heating
equipment increased from 35.8% to 36.6%, due primarily to a change in product mix and a decrease in the cost of some raw materials. Gross profit from hardware products increased from 26.3% to 28.0%,
due to a change in product mix.

Consolidated
selling, general and administrative expenses increased 1.5%, from $16,944,706 to $17,199,793, due primarily to annual wage increases. As a percentage of revenues, selling,
general and administrative expenses increased from 20.5% to 21.3%, due primarily to the decrease in revenues.

Interest
expense increased slightly, from $1,389,383 to $1,390,949. A decrease in average borrowings outstanding was offset by an increase in interest rates.

The
effective tax rates for the years ended December 31, 2000 and 1999 were 37.2% and 36.8%, respectively. See Note 7 of the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

The Company gauges its liquidity and financial stability by the measurements shown in the following table:

December 31,2001

2000

1999(amounts in thousands, except for ratios)Working Capital

$
21,010

$
19,137

$
17,921Current Ratio


3.71 to 1


2.16 to 1


2.04 to 1Shareholders' Equity

$
34,228

$
32,992

$
29,025


During
2001, gross accounts receivable decreased by $830,911. Florida Pneumatic's accounts receivable decreased by approximately $567,000 and Green's accounts receivable decreased by
approximately $416,000. Embassy's accounts receivable increased by approximately $152,000. The decrease in accounts receivable at Florida Pneumatic was primarily due to a decrease in sales during the
fourth quarter of 2001 versus 2000, partially offset by the timing of payments from one major customer and the permanent extension of terms to another. The decrease in accounts receivable at Green was
due primarily to a decrease in sales during the fourth quarter of 2001 versus 2000. The increase in accounts receivable at Embassy was primarily due to an increase in sales during the fourth quarter
of 2001 versus 2000,

Inventories
decreased by $6,195,765 during 2001. Florida Pneumatic's inventory decreased by approximately $5,830,000 and Green's inventory decreased by approximately $1,018,000.
Embassy's inventory increased by approximately $653,000. At both Florida Pneumatic and Green, the decreases in inventory were consistent with the decreases in revenues. At Embassy, the increase in
inventory was
primarily due to the launch of the new boiler product line, and, to a lesser extent, to the initial stocking of inventory for a significant new customer of Franklin.

The
decreases in both accounts receivable and inventories were the primary factors in the decrease of $7,000,000 in short-term borrowings.

During
2000, gross accounts receivable decreased by $1,888,383. Florida Pneumatic's accounts receivable decreased by approximately $1,375,000 and Green's accounts receivable decreased by
approximately $450,000. These decreases in accounts receivable were primarily the result of decreases

8

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in sales in November and December of 2000 versus 1999. Florida Pneumatic's sales for this period decreased by approximately $1,500,000 and Green's sales decreased by approximately $790,000.

Inventories
increased by $2,804,489 during 2000. Florida Pneumatic's inventory increased by approximately $970,000, primarily as the result of additional purchases made in anticipation
of an increase in orders at a larger customer that did not materialize. Green's inventory increased by approximately $1,330,000, primarily as the result of a strategic decision to reduce machine
set-up costs by increasing production run quantities. Also contributing to the increase at Green was the decision to build safety stock for several large customers. Embassy's inventory
increased by approximately $500,000, due primarily to lower than expected sales in the fourth quarter of 2000, as well as to the timing of inventory receipts in late December 2000. Inventory
also increased with the addition of a new boiler product line that is to be marketed beginning in 2001. The net increase of $916,106 resulting from the changes in accounts receivable and inventories
was financed by cash derived from operations.

On
June 25, 2001, the Company renewed its credit agreement, as amended, with Citibank, N.A. This agreement provides the Company with various credit facilities, including revolving
credit loans, term loans for acquisitions and a foreign exchange line. The revolving credit loan facility provides a total of $12,000,000, with various sublimits, for direct borrowings, letters of
credit, bankers' acceptances and equipment loans. At December 31, 2001, there was $2,000,000 outstanding against the revolving credit loan facility. There was also a commitment of approximately
$110,000 at December 31, 2001 for open letters of credit.

The
term loan facility provides a commitment of $15,000,000 to finance acquisitions subject to the lending bank's approval. There was no loan balance outstanding against this facility at
December 31, 2001. There was, however, a standby letter of credit totaling approximately $510,000 outstanding against this facility at December 31, 2001. This standby letter of credit is
used to secure the Economic Development Revenue Bond assumed as part of the acquisition of Green in September 1998.

The
foreign exchange line provides for the availability of up to $10,000,000 in foreign currency forward contracts. These contracts fix the exchange rate on future purchases of Japanese
yen needed for
payments to foreign suppliers. The total amount of foreign currency forward contracts outstanding at December 31, 2001 was approximately $2,160,000.

Under
the Company's credit agreement, the Company is required to adhere to certain financial covenants. At December 31, 2001, and for the year then ended, the Company satisfied
all of these covenants. The credit agreement is subject to annual review by the lending bank.

Capital
spending was approximately $944,000, $1,148,000 and $1,647,000 in 2001, 2000 and 1999, respectively, which amounts were provided from working capital. Capital expenditures for
2002 are expected to be approximately $1,200,000, some of which may be financed through the Company's credit facilities. Included in the expected total for 2002 are capital expenditures relating to
new products, expansion of existing product lines and replacement of equipment.

The
Company, through Florida Pneumatic, imports a significant amount of its purchases from Japan, with payment due in Japanese yen. As a result, the Company is subject to the effects of
foreign currency exchange fluctuations. The Company uses a variety of techniques to mitigate any adverse effects from these fluctuations, including increasing its selling prices, obtaining price
reductions from its overseas suppliers, using alternative supplier sources and entering into foreign currency forward contracts. The strengthening of the U.S. dollar versus the Japanese yen in 2001
had a positive effect on the Company's results of operations and its financial position. However, there can be no assurance that this trend will continue for 2002.

The
Company believes that cash on hand, cash derived from operations and cash available through borrowings under its credit facilities will be sufficient to allow the Company to meet its
foreseeable working capital needs.

9

---

Contractual Cash Obligations and Other Commercial Commitments

At December 31, 2001 the Company had certain contractual cash obligations and other commercial commitments, as set forth in the following tables:

|                                   |  | Payments Due by Period
|---------------------------------- |  | ----------------------
|
|Long-term debt                     |  | $                     
|Short-term borrowings              |  |                       
|                                   |  |                       
|Total contractual cash obligations |  | $                     
|                                   |  |                       

|                           |  | Amount of Commitment Expiration Per Period
|-------------------------- |  | ------------------------------------------
|
|Stand-by letters of credit |  | $510,000                                  
|                           |  |                                           

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS" 142). SFAS 141 requires the use of the purchase method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001, and to all business combinations accounted for by the purchase method for which the date of acquisition is
July 1, 2001 or later. It also requires, upon adoption of SFAS 142, that the Company reclassify, if necessary, the carrying amounts of intangible assets and goodwill, based on the
criteria in SFAS 141.

SFAS 142
requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized. SFAS 142 requires the
Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first
interim quarter after adoption of SFAS 142.

With
respect to the Company's business combinations that were effected prior to June 30, 2001 using the purchase method of accounting, the net carrying amount of the resulting
goodwill as of December 31, 2001 was $7,301,611. Amortization expense was $324,436 for each of the three years ended December 31, 2001, 2000 and 1999. The Company is currently assessing
the effect that the adoption of SFAS 141 and SFAS 142 will have on its consolidated financial statements.

In
October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and addresses financial accounting and reporting for the impairment of long-lived assets to be disposed of. SFAS 144 is required to
be adopted for fiscal years beginning after December 15, 2001. The

10

---

Company is currently assessing the effect that the adoption of SFAS 144 will have on its financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks, which include changes in U.S. and international exchange rates, the prices of certain commodities and currency rates as
measured against the U.S. dollar and each other. The Company attempts to reduce the risks related to foreign currency fluctuation by utilizing financial instruments, pursuant to Company policy.

The
value of the U.S. dollar affects the Company's financial results. Changes in exchange rates may positively or negatively affect the Company's gross margins and operating expenses.
The Company engages in hedging programs aimed at limiting, in part, the impact of currency fluctuations. Using primarily forward exchange contracts, the Company hedges some of those transactions that,
when remeasured according to accounting principles generally accepted in the United States of America, impact the income statement. Factors that could impact the effectiveness of the Company's
programs include volatility of the currency markets and availability of hedging instruments. All currency contracts that are entered into by the Company are components of hedging programs and are
entered into for the sole purpose of hedging an existing or anticipated currency exposure, not for speculation. The Company does not buy or sell financial instruments for trading purposes. Although
the Company maintains these programs to reduce the impact of changes in currency exchange rates, when the U.S. dollar sustains a weakening exchange rate against currencies in which the Company incurs
costs, the Company's costs are adversely affected.

The
Company accounts for changes in the fair value of its foreign currency contracts by marking them to market and recognizing any resulting gains or losses through its statement of
income. The Company also marks its yen-denominated payables to market, recognizing any resulting gains or losses in its statement of income. At December 31, 2001, the Company had
foreign currency forward contracts, maturing in 2002, to purchase approximately $2,160,000 in Japanese yen at contracted forward rates. This amount was in excess of its yen-denominated
payables, resulting in an unrealized loss of approximately $57,000.

The
potential loss in value of the Company's net investment in foreign currency forward contracts resulting from a hypothetical 10 percent adverse change in foreign currency
exchange rates at December 31, 2001 was approximately $240,000.

11

---



Item 8. Financial Statements and Supplementary Data

P & F INDUSTRIES, INC. AND SUBSIDIARIES        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS        AND SUPPLEMENTARY DATA

|                                                                                                                   |  | Page 
|------------------------------------------------------------------------------------------------------------------ |  | -----
|Report of Independent Certified Public Accountants                                                                 |  | 13   
|Consolidated Balance Sheets as of December 31, 2001 and 2000                                                       |  | 14   
|Consolidated Statements of Income for each of the three years ended
December 31, 2001, 2000 and 1999               |  | 15   
|Consolidated Statements of Shareholders' Equity for each of the three years ended
December 31, 2001, 2000 and 1999 |  | 16   
|Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2001, 2000 and 1999           |  | 17   
|Notes to Consolidated Financial Statements                                                                         |  | 18-32
|Scheduled IIValuation and Qualifying Accounts for each of the three years ended
December 31, 2001, 2000 and 1999  |  | 35   

12

---



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We
have audited the accompanying consolidated balance sheets of P & F Industries, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. We have also audited the schedule listed in the accompanying index.
These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and
schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of P & F Industries, Inc. and
subsidiaries at December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.

Also,
in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.

/s/ BDO Seidman, LLP

BDO
Seidman, LLP

New
York, New York
March 15, 2002

13

---



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

|                                                                                       |                                                                                                  | December 31,                                                                 |           
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | ----------
|
|ASSETS                                                                                 |                                                                                                 
|CURRENT:                                                                               |                                                                                                  |                                                                              |           
|                                                                                       | Cash                                                                                             |                                                                              | $         
|                                                                                       | Accounts receivable, less allowance for possible losses of $404,557 and $496,569 (Notes 3 and 9) |                                                                              |           
|                                                                                       | Inventories (Notes 2 and 3)                                                                      |                                                                              |           
|                                                                                       | Deferred income taxes (Note 7)                                                                   |                                                                              |           
|                                                                                       | Prepaid expenses and other                                                                       |                                                                              |           
|                                                                                       |                                                                                                  |                                                                              |           
|                                                                                       |                                                                                                  | TOTAL CURRENT ASSETS                                                         |           
|                                                                                       |                                                                                                  |                                                                              |           
|PROPERTY AND EQUIPMENT (Notes 3 and 4):                                                |                                                                                                  |                                                                              |           
|                                                                                       | Land                                                                                             |                                                                              |           
|                                                                                       | Buildings and improvements                                                                       |                                                                              |           
|                                                                                       | Machinery and equipment                                                                          |                                                                              |           
|                                                                                       |                                                                                                  |                                                                              |           
|                                                                                       |                                                                                                  |                                                                              | 20,202,745
|                                                                                       | Less accumulated depreciation and amortization                                                   |                                                                              |           
|                                                                                       |                                                                                                  |                                                                              |           
|NET PROPERTY AND EQUIPMENT                                                             |                                                                                                  |                                                                              | 10,301,095
|                                                                                       |                                                                                                  |                                                                              |           
|GOODWILL, net of accumulated amortization of $2,163,347 and $1,838,911                 |                                                                                                  |                                                                              | 7,301,611 
|OTHER ASSETS                                                                           |                                                                                                  |                                                                              | 102,615   
|                                                                                       |                                                                                                  |                                                                              |           
|                                                                                       |                                                                                                  | $                                                                            | 46,469,522
|                                                                                       |                                                                                                  |                                                                              |           
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                   |                                                                                                 
|CURRENT LIABILITIES:                                                                   |                                                                                                  |                                                                              |           
|                                                                                       | Short-term borrowings (Note 3)                                                                   |                                                                              | $         
|                                                                                       | Accounts payable                                                                                 |                                                                              |           
|                                                                                       | Accruals:                                                                                        |                                                                              |           
|                                                                                       |                                                                                                  | Compensation                                                                 |           
|                                                                                       |                                                                                                  | Other                                                                        |           
|                                                                                       | Current maturities of long-term debt (Note 4)                                                    |                                                                              |           
|                                                                                       |                                                                                                  |                                                                              |           
|                                                                                       |                                                                                                  | TOTAL CURRENT LIABILITIES                                                    |           
|LONG-TERM DEBT, less current maturities (Note 4)                                       |                                                                                                  |                                                                              | 3,548,945 
|DEFERRED INCOME TAXES (Note 7)                                                         |                                                                                                  |                                                                              | 939,000   
|                                                                                       |                                                                                                  |                                                                              |           
|                                                                                       |                                                                                                  | TOTAL LIABILITIES                                                            |           
|                                                                                       |                                                                                                  |                                                                              |           
|COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 8) SHAREHOLDERS' EQUITY (Notes 5 and 6): |                                                                                                  |                                                                              |           
|                                                                                       | Preferred stock$10 par; authorized2,000,000 shares; no shares outstanding                      |                                                                              |           
|                                                                                       | Common Stock:                                                                                    |                                                                              |           
|                                                                                       |                                                                                                  | Class A$1 par; authorized7,000,000 shares; issued3,677,593 shares         |           
|                                                                                       |                                                                                                  | Class B$1 par; authorized2,000,000 shares; no shares issued or outstanding |           
|                                                                                       | Additional paid-in capital                                                                       |                                                                              |           
|                                                                                       | Retained earnings                                                                                |                                                                              |           
|Treasury stock, at cost (157,445 shares and 72,185 shares)                             |                                                                                                  |                                                                              | (1,287,165
|                                                                                       |                                                                                                  |                                                                              |           
|                                                                                       |                                                                                                  | TOTAL SHAREHOLDERS' EQUITY                                                   |           
|                                                                                       |                                                                                                  |                                                                              |           
|                                                                                       |                                                                                                  | $                                                                            | 46,469,522
|                                                                                       |                                                                                                  |                                                                              |           

See accompanying notes to consolidated financial statements.

14

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

|                                                      |                                     | Year Ended December 31,
|----------------------------------------------------- | ----------------------------------- | -----------------------
|
|REVENUES (Note 9):                                    |                                     |                        
|                                                      | Net sales                           |                        
|                                                      | Other                               |                        
|                                                      |                                     |                        
|                                                      |                                     |                        
|                                                      |                                     |                        
|COSTS AND EXPENSES:                                   |                                     |                        
|                                                      | Cost of sales                       |                        
|                                                      | Selling, general and administrative |                        
|                                                      | Interest                            |                        
|                                                      |                                     |                        
|                                                      |                                     |                        
|                                                      |                                     |                        
|INCOME BEFORE TAXES ON INCOME                         |                                     |                        
|TAXES ON INCOME (Note 7)                              |                                     |                        
|                                                      |                                     |                        
|NET INCOME                                            |                                     | $                      
|                                                      |                                     |                        
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note 11): |                                     |                        
|                                                      | BASIC                               |                        
|                                                      |                                     |                        
|                                                      | DILUTED                             |                        
|                                                      |                                     |                        
|EARNINGS PER SHARE OF
COMMON STOCK (Note 11):         |                                     |                        
|                                                      | BASIC                               |                        
|                                                      |                                     |                        
|                                                      | DILUTED                             |                        
|                                                      |                                     |                        

See
accompanying notes to consolidated financial statements

15

---



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

|                                                            |  | Class A Common
Stock$1 Par |  |   |           |  |   |           |  |   |           
|----------------------------------------------------------- |  | --------------------------- |  | - | --------- |  | - | --------- |  | - | ----------
|
|
|
|Balance, January 1, 1999                                    |  | 3,239,345                   |  | $ | 3,239,345 |  | $ | 8,020,677 |  | $ | 13,190,030
|Net income for the year ended December 31, 1999             |  |                            |  |   |          |  |   |          |  |   | 4,545,505 
|Exercise of stock options                                   |  | 265,548                     |  |   | 265,548   |  |   | 261,925   |  |   |          
|Shares surrendered as payment for exercise of stock options |  |                            |  |   |          |  |   |          |  |   |          
|                                                            |  |                             |  |   |           |  |   |           |  |   |           
|Balance, December 31, 1999                                  |  | 3,504,893                   |  |   | 3,504,893 |  |   | 8,292,602 |  |   | 17,735,535
|Net income for the year ended December 31, 2000             |  |                            |  |   |          |  |   |          |  |   | 3,824,940 
|Exercise of stock options                                   |  | 172,700                     |  |   | 172,700   |  |   | 181,537   |  |   |          
|Shares surrendered as payment for exercise of stock options |  |                            |  |   |          |  |   |          |  |   |          
|Purchase of Class A Common Stock                            |  |                            |  |   |          |  |   |          |  |   |          
|                                                            |  |                             |  |   |           |  |   |           |  |   |           
|Balance, December 31, 2000                                  |  | 3,677,593                   |  |   | 3,677,593 |  |   | 8,464,139 |  |   | 21,560,475
|Net income for the year ended December 31, 2001             |  |                            |  |   |          |  |   |          |  |   | 1,812,808 
|Purchase of Class A Common Stock                            |  |                            |  |   |          |  |   |          |  |   |          
|                                                            |  |                             |  |   |           |  |   |           |  |   |           
|Balance, December 31, 2001                                  |  | 3,677,593                   |  | $ | 3,677,593 |  | $ | 8,464,139 |  | $ | 23,373,283
|                                                            |  |                             |  |   |           |  |   |           |  |   |           

See
accompanying notes to consolidated financial statements.

16

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

|                                                                                            |                                                      | Year Ended December 31,                             |          
|------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------- | ---------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |                                                      |                                                     |          
|Net income                                                                                  |                                                      | $                                                   | 1,812,808
|                                                                                            |                                                      |                                                     |          
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |                                                      |                                                     |          
|                                                                                            | Depreciation and amortization                        |                                                     |          
|                                                                                            | Amortization of goodwill and other intangible assets |                                                     |          
|                                                                                            | Provision for losses on accounts receivablenet      |                                                     |          
|                                                                                            | Deferred income taxes                                |                                                     |          
|                                                                                            | Loss (gain) on disposal of fixed assets              |                                                     |          
|Decrease (increase) in:                                                                     |                                                      |                                                     |          
|                                                                                            | Accounts receivable                                  |                                                     |          
|                                                                                            | Inventories                                          |                                                     |          
|                                                                                            | Prepaid expenses and other                           |                                                     |          
|                                                                                            | Other assets                                         |                                                     |          
|Increase (decrease) in:                                                                     |                                                      |                                                     |          
|                                                                                            | Accounts payable                                     |                                                     |          
|                                                                                            | Accruals                                             |                                                     |          
|                                                                                            |                                                      |                                                     |          
|                                                                                            |                                                      | Total adjustments                                   |          
|                                                                                            |                                                      |                                                     |          
|                                                                                            |                                                      | Net cash provided by operating activities           |          
|                                                                                            |                                                      |                                                     |          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |                                                      |                                                     |          
|                                                                                            | Capital expenditures                                 |                                                     |          
|                                                                                            | Proceeds from sale of fixed assets                   |                                                     |          
|                                                                                            |                                                      |                                                     |          
|                                                                                            |                                                      | Net cash used in investing activities               |          
|                                                                                            |                                                      |                                                     |          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |                                                      |                                                     |          
|                                                                                            | Proceeds from short-term borrowings                  |                                                     | $        
|                                                                                            | Repayments of short-term borrowings                  |                                                     |          
|                                                                                            | Proceeds from mortgage refinancing                   |                                                     |          
|                                                                                            | Principal payments on long-term debt                 |                                                     |          
|                                                                                            | Proceeds from exercise of stock options and warrants |                                                     |          
|                                                                                            | Purchase of Class A Common Stock                     |                                                     |          
|                                                                                            |                                                      |                                                     |          
|                                                                                            |                                                      | Net cash (used in) provided by financing activities |          
|                                                                                            |                                                      |                                                     |          
|NET INCREASE (DECREASE) IN CASH                                                             |                                                      |                                                     | 119,411  
|CASH AT BEGINNING OF YEAR                                                                   |                                                      |                                                     | 388,422  
|                                                                                            |                                                      |                                                     |          
|CASH AT END OF YEAR                                                                         |                                                      | $                                                   | 507,833  
|                                                                                            |                                                      |                                                     |          

See
accompanying notes to consolidated financial statements.

17

---



P & F INDUSTRIES, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1SUMMARY OF ACCOUNTING POLICIES

Principles of Consolidation

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

P &
F Industries, Inc. ("P & F") conducts business operations through its three wholly-owned subsidiaries; Florida Pneumatic Manufacturing Corporation ("Florida
Pneumatic"), Green Manufacturing, Inc. ("Green") and Embassy Industries, Inc. ("Embassy"). P & F and its subsidiaries are herein referred to collectively as the "Company".

Florida
Pneumatic is engaged in the importation, manufacture and sale of pneumatic hand tools, primarily for the industrial and retail markets, and the importation and sale of compressor
air filters. Florida Pneumatic also markets, through its Berkley Tool division ("Berkley"), a line of pipe cutting and threading tools, wrenches and replacement electrical components for a
widely-used brand of pipe cutting and threading machines. Green is engaged primarily in the manufacture, development and sale of heavy-duty welded custom designed hydraulic
cylinders. Green also manufactures a line of access equipment for the petro-chemical industry and a line of post hole digging equipment for the agricultural industry. Embassy is engaged in the
manufacture and sale of baseboard heating products and the importation and sale of radiant heating systems. Embassy also imports a line of door and window hardware items through its Franklin hardware
division ("Franklin"). Note 9 of the Notes to
Consolidated Financial Statements presents financial information for the segments of the Company's business.

Basis of Financial Statement Presentation

In preparing its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, the Company is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.

Revenue Recognition

The Company records revenues upon shipment with related risks and title passing to the customers. Estimates of losses for bad debts, returns and other allowances
are recorded at the time of the sale.

Financial Instruments

The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and short-term debt, approximated fair value as
of December 31, 2001 and 2000, because of the relatively short-term maturity of these instruments. The carrying value of long-term debt approximated fair value as of
December 31, 2001 and 2000, based upon quoted market prices for the same or similar debt issues.

18

---

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property and Equipment and Depreciation and Amortization

Property and equipment are stated at cost.

Depreciation
and amortization are computed by the straight-line method for financial reporting purposes and by the straight-line and accelerated methods for
income tax purposes. The estimated useful lives for financial reporting purposes are as follows:

Buildings and improvements
10 - 30 yearsMachinery and equipment
3 - 12 years


Long-Lived Assets

The Company reviews certain long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. In that regard, the Company assesses the recoverability of such assets based upon estimated non-discounted cash flow forecasts.

Goodwill

The excess of the purchase price over fair value of net assets of acquired businesses arises from business combinations accounted for as purchases and has been
amortized on a straight-line basis over periods from 25 to 40 years. Amortization expense of $324,436 was recognized for each of the three years ended December 31, 2001, 2000
and 1999. At December 31, 2001, the Company had recorded approximately $7,300,000 in goodwill, net of accumulated amortization.

In
June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and
No. 142, "Goodwill and Other Intangible Assets" ("SFAS" 142). SFAS 141 requires the use of the purchase method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001, and to all business combinations accounted for by the purchase method for which the date of
acquisition is July 1, 2001 or later. It also requires, upon adoption of SFAS 142, that the Company reclassify, if necessary, the carrying amounts of intangible assets and goodwill,
based on the criteria in SFAS 141.

SFAS 142
requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized.

19

---

SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.

With
respect to the Company's business combinations that were effected prior to June 30, 2001 using the purchase method of accounting, the net carrying amount of the resulting
goodwill as of December 31, 2001 was $7,301,611. Amortization expense was $324,436 for each of the three years ended December 31, 2001, 2000 and 1999. The Company is currently assessing
the effect that the adoption of SFAS 141 and SFAS 142 will have on its consolidated financial statements.

The
Company's operational policy for the assessment and measurement of any impairment in the value of excess of cost over net assets acquired that is other than temporary is to evaluate
the recoverability and remaining life of its goodwill and determine whether the goodwill should be completely or partially written off. The Company will recognize an impairment of goodwill if the fair
value of the goodwill is deemed to be less than its carrying value. If the Company determines that goodwill has been impaired, the Company will reflect the impairment through a reduction in the
carrying value of goodwill, in an amount equal to the excess of the carrying amount of the goodwill over the amount of the undiscounted estimated operating cash flows.

Taxes on Income

The Company files a consolidated Federal tax return. The parent company and each of its subsidiaries file separate state and local tax returns.

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

Earnings per Share

Basic earnings per share is based only on the average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the effect
of shares of common stock issuable upon the exercise of options, warrants and convertible securities.

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

Stock-Based Compensation

The Company accounts for its stock option awards to its employees under the intrinsic value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic value based method, compensation cost is the excess,

20

---

if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company makes pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting had been applied, as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."

Shipping and Handling Costs

The Company generally does not bill customers for shipping and handling costs. Expenses for shipping and handling costs, net of amounts billed to customers, are
included in selling, general and administrative expenses, and totaled approximately $355,000, $400,000 and $395,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

Derivative Financial Instruments

For the year ended December 31, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivatives and Hedging Activities". SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. The impact on the Company's financial statements from the
adoption of SFAS 133 was not material.

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

For
derivative instruments that are designated and qualify as fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified
portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedge item attributable to the hedged risk are
recognized in earnings in the current period. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure of variability in the expected future cash
flows that would be attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated comprehensive loss (a component
of shareholders' equity) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument, if
any (i.e., the ineffective portion and any portion of the derivative instrument excluded from the assessment of effectiveness), is recognized in earnings in the current period. For derivative
instruments not designated as hedging instruments, changes in the fair market values are recognized in earnings, as a component of cost of goods sold.

The
Company accounts for changes in the fair value of its foreign currency contracts by marking them to market and recognizing any resulting gains or losses through its statement of
income. The Company also marks its yen-denominated payables to market, recognizing any resulting gains or losses in its statement of income. At December 31, 2001, the Company had
foreign currency forward contracts, maturing in 2002, to purchase approximately $2,160,000 in Japanese yen at contracted forward rates. This amount was in excess of its yen-denominated
payables, resulting in an unrealized loss of approximately $57,000.

21

---

New Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and addresses financial accounting and reporting for the impairment of long-lived assets to be
disposed of. SFAS 144 is required to be adopted for fiscal years beginning after December 15, 2001. The Company is currently assessing the effect that the adoption of SFAS 144
will have on its consolidated financial statements.

22

---



NOTE 2INVENTORIES

Inventories consist of:

December 31,2001

2000Raw material

$
3,122,061

$
3,973,442Work-in process


740,036


934,283Finished goods


13,361,128


18,511,265$
17,223,225

$
23,418,990


NOTE 3SHORT-TERM BORROWINGS

The Company's credit agreement with a bank includes a revolving credit loan facility, which provides a total of $12,000,000, with various sublimits, for direct
borrowings, letters of credit, bankers' acceptances and equipment loans. At December 31, 2001, there was $2,000,000 outstanding against the revolving
credit loan facility. There was also a commitment of approximately $110,000 at December 31, 2001 for open letters of credit.

The
credit agreement also includes a foreign exchange line, which provides for the availability of up to $10,000,000 in foreign currency forward contracts. These contracts fix the
exchange rate on future purchases of Japanese yen needed for payments to foreign suppliers. The total amount of foreign currency forward contracts outstanding at December 31, 2001 was
approximately $2,160,000.

Direct
borrowings under the Company's revolving credit loan facility are secured by the accounts receivable, inventory and equipment of the Company and are cross-guaranteed by each of
the Company's subsidiaries. These borrowings bear interest at either the prime interest rate or LIBOR plus 1.6%. The prime interest rate at December 31, 2001 was 4.75% and LIBOR was
approximately 1.9%. The prime interest rate at December 31, 2000 was 9.5% and LIBOR was approximately 6.6%.

Under
the Company's credit agreement, the Company is required to adhere to certain financial covenants. At December 31, 2001, and for the year then ended, the Company satisfied
all of these covenants. The credit agreement is subject to annual review by the lending bank.

23

---

NOTE 4LONG-TERM DEBT

Long-term debt consists of:

|                                                                                                                                             |  | December 31,
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------
|
|Mortgage loan$17,438 payable monthly (plus interest at 8.16%) through May 2006, when a final payment of approximately $1,435,000 is due (a) |  | $           
|Mortgage loan$16,370 payable monthly (plus interest at 7.09%) through February 2014 (a)                                                     |  |             
|Economic Development Revenue Bond  payable yearly in various principal amounts (plus interest at variable rates) through November 2004 (b)  |  |             
|                                                                                                                                             |  |             
|                                                                                                                                             |  |             
|Less current maturities                                                                                                                      |  |             
|                                                                                                                                             |  |             
|                                                                                                                                             |  | $           
|                                                                                                                                             |  |             

---

The
aggregate amounts of the long-term debt scheduled to mature in each of the years ended December 31 are as follows: 2002$313,075;
2003$329,812; 2004$357,529; 2005$191,845; 2006$1,570,927; 2007$121,653; and 2008 and thereafter$977,179. Interest expense
on long-term debt was $284,137,$580,125 and $653,297 for the years ended December 31, 2001, 2000 and 1999, respectively.

The
Company's credit agreement with a bank includes a term loan facility, which provides a commitment of $15,000,000 to finance acquisitions subject to the lending bank's approval. There
was no loan balance outstanding against this facility at December 31, 2001. There was, however, a standby letter of credit totaling approximately $510,000 outstanding against this facility at
December 31, 2001. This standby letter of credit is used to secure the Economic Development Revenue Bond assumed as part of the acquisition of Green.

NOTE 5CAPITAL STOCK TRANSACTIONS

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

NOTE 6STOCK OPTIONS AND WARRANTS

The Company has an Incentive Stock Option Plan (as amended) (the "Plan"), which authorizes the issuance, to employees and directors, of options to purchase a
maximum of 1,100,000 shares of Class A Common Stock. These options must be issued within ten years of the effective date of the Plan and are exercisable for a ten year period from the date of
grant, at prices not less than 100% of the

24

---

market value of the Class A Common Stock on the date the option is granted. Options granted to any 10% stockholder are exercisable for a five year period from the date of grant, at prices not
less than 110% of the market value of the Class A Common Stock on the date the option is granted.

The
Company applies the Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB Opinion 25"), and related interpretations in accounting for the Plan.
Under APB Opinion 25, no compensation cost is recognized if the exercise price of the Company's employee stock options is equal to or greater than the market price of the underlying stock on the date
of the grant.

Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", requires the Company to provide pro forma information regarding
net income and earnings per share as if compensation cost for the Plan had been determined in accordance with the fair value method prescribed by SFAS 123. The Company estimates the fair value
of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions for options granted in 2000 and 1999, respectively: no dividends
paid for any of these years; expected volatility of 39.0% and 33.9%; risk-free interest rates of 6.1% and 5.1%; and expected lives of 10.0 years and 10.0 years. No options
were granted in 2001.

The
weighted-average fair values of options for which the exercise price equaled the market price on the grant date were $5.41 in 2000 and $4.97 in 1999.

Under
the provisions of SFAS 123, the Company's income from continuing operations available to common shareholders and its basic and diluted earnings per share would have changed
to the pro forma amounts indicated below:

Year Ended December 31,2001

2000

1999Income from continuing operations available to common shareholders:As reported

$
1,812,808

$
3,824,940

$
4,545,505Pro forma

$
1,812,808

$
3,818,145

$
4,492,088Basic earnings per share:As reported

$
.51

$
1.07

$
1.35Pro forma

$
.51

$
1.07

$
1.33Diluted earnings per share:As reported

$
.50

$
1.04

$
1.23Pro forma

$
.50

$
1.04

$
1.21


25

---

The
following table contains information on stock options for the three years ended December 31, 2001:

|                                        |  | Option Shares |   | Exercise Price
Range Per Share |              | Weighted Average
Exercise Price
|--------------------------------------- |  | ------------- | - | ------------------------------ | ------------ | -------------------------------
|Outstanding, January 1, 1999            |  | 820,000       |   | $                              | 1.44 to 8.66 |                                
|Granted                                 |  | 17,000        |   |                                | 8.94 to 9.00 |                                
|Exercised                               |  | (265,600      | ) |                                | 1.81 to 1.99 |                                
|                                        |  |               |   |                                |              |                                
|Outstanding, December 31, 1999          |  | 571,400       |   |                                | 1.44 to 9.00 |                                
|Granted                                 |  | 2,000         |   |                                | 8.75         |                                
|Exercised                               |  | (172,700      | ) |                                | 1.50 to 5.25 |                                
|Expired                                 |  | (4,400        | ) |                                | 1.50 to 7.88 |                                
|                                        |  |               |   |                                |              |                                
|Outstanding, December 31, 2000 and 2001 |  | 396,300       |   | $                              | 1.44 to 9.00 |                                
|                                        |  |               |   |                                |              |                                

There
were options available for issuance under the Plan as of December 31 of each year as follows: 1999360,200; 2000358,200; and
2001358,200. All of the options outstanding at December 31, 2000 were issued under the Plan. During the year ended December 31, 2000, 117,700 options issued under a previous
plan were exercised and 1,400 options issued under the same plan expired.

The
following table summarizes information about stock options outstanding and exercisable at December 31, 2001:

Range of
Exercise Prices

Outstanding

Weighted
Average
Remaining
Contractual
Life (Years)

Weighted Average
Exercise Price

Exercisable

Weighted Average
Exercise Price$5.71

52,500

.4

$
5.71

52,500

$
5.715.71

17,500

.4


5.71




8.66

11,500

1.2


8.66




1.44

15,000

1.6


1.44

15,000


1.441.94

48,000

3.0


1.94

48,000


1.943.75 to 5.25

74,300

5.2


4.98

74,300


4.987.88

158,500

6.2


7.88

158,500


7.888.94 to 9.00

17,000

7.2


8.96

17,000


8.968.75

2,000

8.3


8.75

2,000


8.751.44 to 9.00

396,300

4.3

$
6.06

367,300

$
6.00


26

---

NOTE 7TAXES ON INCOME

Provisions for taxes on income in the consolidated statements of income consist of:

Year Ended December 31,2001

2000

1999Current:Federal

$
953,000

$
1,929,000

$
2,262,000State and local


88,000


164,000


204,000Total current


1,041,000


2,093,000


2,466,000Deferred:Federal


15,000


159,000


170,000State and local


3,000


12,000


16,000Total deferred


18,000


171,000


186,000Total taxes on income

$
1,059,000

$
2,264,000

$
2,652,000


Deferred
tax assets (liabilities) consist of:

December 31,2001

2000Current deferred tax assets:Bad debt reserves

$
153,000

$
187,000Warranty and other reserves


427,000


341,000$
580,000

$
528,000Non-current deferred tax liabilities:Depreciation

($
760,000
)
($
747,000
)Goodwill


(179,000
)

(122,000
)($
939,000
)
($
869,000
)


A
reconciliation of the Federal statutory rate to the total effective tax rate applicable to income before taxes on income is as follows:

Year Ended December 31,2001

2000

1999$

%

$

%

$

%Federal income taxes computed at statutory rates

977,000

34.0

2,070,000

34.0

2,447,000

34.0Increase in taxes resulting from:State and local taxes, net of Federal tax benefit

58,000

2.0

108,000

1.8

135,000

1.9Expenses not deductible for tax purposes

100,000

3.5

100,000

1.6

110,000

1.5Other

(76,000
)
(2.6
)
(14,000
)
(.2
)
(40,000
)
(.6
)Taxes on income

1,059,000

36.9

2,264,000

37.2

2,652,000

36.8


27

---



NOTE 8COMMITMENTS AND CONTINGENCIES

(a)    P & F and two of its subsidiaries have adopted a defined contribution pension plan, which covers substantially all non-union
employees. Contributions to this plan were determined as a percentage of compensation. The amounts recognized as pension expense for this plan were approximately $345,000, $332,000 and $312,000 for
the years ended December 31, 2001, 2000 and 1999, respectively.

In
conjunction with the acquisition of Green, P & F acquired a defined contribution 401(k) plan, which covers all of Green's employees. Employer contributions to this plan were
determined as a percentage of employee contributions. The amounts recognized as expense for this plan were approximately $62,000 for the year ended December 31, 2001, approximately $82,000 for
the year ended December 31, 2000 and approximately $62,000 for the year ended December 31, 1999.

One
of P & F's subsidiaries also participates in a multi-employer pension plan. This plan provides defined benefits to all union workers. Contributions to this plan are determined
by the union contract. The Company does not administer the plan funds and does not have any control over the plan funds. The amounts recognized as pension expense for this plan were approximately
$32,000, $35,000 and $32,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

(b)    P &
F has an employment agreement with an officer. This agreement currently provides for a minimum annual aggregate salary of $710,000 through May 2008.
This agreement provides that if a change in control of the Company occurs and, as a result, the officer is terminated or is unable to exercise his functions and duties and therefore resigns, he shall
have the option to receive either full compensation for the remaining term of the agreement or a severance allowance equal to three times average annual compensation for the five previous years.

(c)    Florida
Pneumatic purchases significant amounts of pneumatic tools from two foreign suppliers. Although other sources are available, the loss of either supplier could
adversely affect operating results.

(d)    Green
purchases significant amounts of raw materials from one supplier. Other sources are available, however, and the Company believes that the loss of this supplier
would not adversely affect operating results.

(e)    The
Company is a defendant or co-defendant in various actions brought about in the course of conducting its business. The Company has accrued approximately
$400,000 for possible liability relating to these actions.

NOTE 9SEGMENTS OF BUSINESS

The Company currently operates four business segments: pneumatic tools and related equipment, hydraulic cylinders, heating equipment and hardware. The accounting
policies of each of the segments are the same as those described in Note 1. The Company evaluates segment performance based on operating income.

28

---

The
following presents financial information by segment for the years ended December 31, 2001, 2000 and 1999. Operating income excludes general corporate expenses, interest
expense and income taxes. Identifiable assets are those assets directly owned or utilized by the particular business segment.

|2001                                           |  | Consolidated |        | Pneumatic
Tools |   | Hydraulic
Cylinders |  | Heating
Equipment |        | Hardware
|---------------------------------------------- |  | ------------ | ------ | --------------- | - | ------------------- |  | ----------------- | ------ | --------
|
|Revenues from external customers               |  | $            | 67,196 |                 | $ | 38,360              |  | $                 | 14,377 |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Operating income (loss)                        |  | $            | 6,376  |                 | $ | 5,990               |  | $                 | (362   | )       
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|General corporate expense                      |  |              | (2,708 | )               |   |                     |  |                   |        |         
|Interest expense                               |  |              | (796   | )               |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Income before taxes on income                  |  | $            | 2,872  |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Identifiable assets at December 31, 2001       |  | $            | 45,053 |                 | $ | 23,530              |  | $                 | 13,290 |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Corporate assets                               |  |              | 1,417  |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Total assets at December 31, 2001              |  | $            | 46,470 |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Depreciation and amortization ($15 corporate)  |  | $            | 1,418  |                 | $ | 475                 |  | $                 | 602    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Amortization of goodwill and other intangibles |  | $            | 342    |                 | $ | 96                  |  | $                 | 240    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Capital expenditures ($25 corporate)           |  | $            | 944    |                 | $ | 109                 |  | $                 | 410    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         

|2000                                           |  | Consolidated |        | Pneumatic
Tools |   | Hydraulic
Cylinders |  | Heating
Equipment |        | Hardware
|---------------------------------------------- |  | ------------ | ------ | --------------- | - | ------------------- |  | ----------------- | ------ | --------
|
|Revenues from external customers               |  | $            | 80,899 |                 | $ | 44,872              |  | $                 | 20,220 |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Operating income                               |  | $            | 10,427 |                 | $ | 8,252               |  | $                 | 929    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|General corporate expense                      |  |              | (2,947 | )               |   |                     |  |                   |        |         
|Interest expense                               |  |              | (1,391 | )               |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Income before taxes on income                  |  | $            | 6,089  |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Identifiable assets at December 31, 2000       |  | $            | 52,659 |                 | $ | 30,481              |  | $                 | 14,985 |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Corporate assets                               |  |              | 1,494  |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Total assets at December 31, 2000              |  | $            | 54,153 |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Depreciation and amortization ($15 corporate)  |  | $            | 1,360  |                 | $ | 479                 |  | $                 | 584    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Amortization of goodwill and other intangibles |  | $            | 342    |                 | $ | 96                  |  | $                 | 240    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Capital expenditures ($1 corporate)            |  | $            | 1,148  |                 | $ | 216                 |  | $                 | 271    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         

29

---

|1999                                           |  | Consolidated |        | Pneumatic
Tools |   | Hydraulic
Cylinders |  | Heating
Equipment |        | Hardware
|---------------------------------------------- |  | ------------ | ------ | --------------- | - | ------------------- |  | ----------------- | ------ | --------
|
|Revenues from external customers               |  | $            | 82,700 |                 | $ | 46,708              |  | $                 | 20,612 |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Operating income                               |  | $            | 11,736 |                 | $ | 9,304               |  | $                 | 1,208  |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|General corporate expense                      |  |              | (3,149 | )               |   |                     |  |                   |        |         
|Interest expense                               |  |              | (1,389 | )               |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Income before taxes on income                  |  | $            | 7,198  |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Identifiable assets at December 31, 1999       |  | $            | 52,066 |                 | $ | 31,127              |  | $                 | 14,563 |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Corporate assets                               |  |              | 2,174  |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Total assets at December 31, 1999              |  | $            | 54,240 |                 |   |                     |  |                   |        |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Depreciation and amortization ($13 corporate)  |  | $            | 1,241  |                 | $ | 440                 |  | $                 | 528    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Amortization of goodwill and other intangibles |  | $            | 355    |                 | $ | 109                 |  | $                 | 240    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         
|Capital expenditures ($7 corporate)            |  | $            | 1,647  |                 | $ | 867                 |  | $                 | 773    |         
|                                               |  |              |        |                 |   |                     |  |                   |        |         

The pneumatic tools segment has one customer that accounted for 21.4%,23.4% and 24.7% of
consolidated revenues for the years ended December 31, 2001, 2000 and 1999, respectively. This customer also accounted for 24.9% and 24.8% of consolidated accounts receivable as of
December 31, 2001 and 2000, respectively. A second customer, of both the pneumatic tools segment and the hardware segment, accounted for 18.0%, 14.0% and 10.1% of consolidated revenues for the
years ended December 31, 2001, 2000 and 1999, respectively, and 21.2% and 15.7% of consolidated accounts receivable as of December 31, 2001 and 2000, respectively. There were no other
major customers requiring disclosure.

30

---

NOTE 10UNAUDITED INTERIM CONSOLIDATED FINANCIAL INFORMATION

Unaudited interim consolidated financial information for the two years ended December 31, 2001 and 2000 is summarized as follows:

|                                    |         | Quarter Ended
|----------------------------------- | ------- | -------------
|
|2001                                |         |              
|Revenues                            |         | $            
|                                    |         |              
|Gross Profit                        |         |              
|                                    |         |              
|Net income                          |         |              
|                                    |         |              
|Earnings per share of common stock: |         |              
|                                    | Basic   |              
|                                    |         |              
|                                    | Diluted |              
|                                    |         |              
|2000                                |         |              
|Revenues                            |         | $            
|                                    |         |              
|Gross Profit                        |         |              
|                                    |         |              
|Net income                          |         |              
|                                    |         |              
|Earnings per share of common stock: |         |              
|                                    | Basic   |              
|                                    |         |              
|                                    | Diluted |              
|                                    |         |              

During
the fourth quarter of 2001, the Company recorded net adjustments decreasing its net income by approximately $500,000, relating primarily to adjustments to inventory valuation, as
well as to reserves for bad debts and legal expenses.

During
the fourth quarter of 2000, the Company recorded net adjustments decreasing its net income by approximately $265,000, relating to adjustments to reserves for bad debts, inventory
and insurance.

31

---

NOTE 11EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per common share from continuing operations:

|                                  |                                                                                                            | Year Ended December 31,
|--------------------------------- | ---------------------------------------------------------------------------------------------------------- | -----------------------
|
|Numerator:                        |                                                                                                            |                        
|                                  | Numerator for basic and diluted earnings per common sharenet income                                       |                        
|                                  |                                                                                                            |                        
|Denominator:                      |                                                                                                            |                        
|                                  | Denominator for basic earnings per shareweighted average common shares outstanding                        |                        
|Effect of dilutive securities:    |                                                                                                            |                        
|                                  | Common stock options                                                                                       |                        
|                                  |                                                                                                            |                        
|                                  | Denominator for diluted earnings per shareadjusted weighted average common shares and assumed conversions |                        
|                                  |                                                                                                            |                        
|Basic earnings per common share   |                                                                                                            | $                      
|                                  |                                                                                                            |                        
|Diluted earnings per common share |                                                                                                            | $                      
|                                  |                                                                                                            |                        

There
were outstanding during the years ended December 31, 2001, 2000 and 1999 stock options whose exercise prices were lower than the average market values for the respective
periods. These options are anti-dilutive and are excluded from the computation of earnings per share. The weighted average anti-dilutive options outstanding for the years ended
December 31, 2001, 2000 and 1999 were as follows: 2001 - 189,000; 2000 - 150,500; and 1999 - 51,375.

NOTE 12SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the year for:

Year Ended December 31,2001

2000

1999Interest

$
859,677

$
1,425,189

$
1,400,165Income taxes

$
1,122,256

$
2,426,470

$
2,414,890


During
the years ended December 31, 2000 and 1999, the Company received 19,925 and 49,235 shares, respectively, of Class A Common Stock in connection with the exercise of
stock options. The value of these shares was recorded at $192,500 and $498,500, respectively.

32

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

None.

PART III

Item 10.    Directors and Executive Officers of the Registrant

Information relating to the directors and executive officers of the registrant is set forth in the registrant's definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders (the "Proxy Statement") to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and is
hereby incorporated by reference.

Item 11.    Executive Compensation

Information relating to executive compensation is set forth in the Proxy Statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby incorporated by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

Information relating to the security ownership of certain beneficial owners and management is set forth in the Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby incorporated by reference.

Item 13.    Certain Relationships and Related Transactions

Information relating to certain relationships and related transactions is set forth in the Proxy Statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, and is hereby incorporated by reference.

33

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PART IV

Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

|               |  |                                                                                                 |   |                                                                                                                                                                                                                   |  | Page 
|-------------- |  | ----------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|(a)            |  | The following documents are filed as part of this Annual Report on Form 10-K:                   |   |                                                                                                                                                                                                                  
|               |  | (1                                                                                              | ) | Financial Statements:                                                                                                                                                                                             |  |      
|               |  |                                                                                                 |   | The consolidated financial statements of the registrant as set forth under Item 8 of this report.                                                                                                                 |  |      
|               |  | (2                                                                                              | ) | Financial Statement Schedule:                                                                                                                                                                                     |  |      
|               |  |                                                                                                 |   | Schedule IIValuation and Qualifying Accounts for each of the three years ended December 31, 2001, 2000 and 1999                                                                                                  |  | 35   
|               |  |                                                                                                 |   | All other schedules are omitted because they are not applicable, or because the required information is otherwise shown in the consolidated financial statements or notes thereto.                                |  |      
|               |  | (3                                                                                              | ) | Exhibits:                                                                                                                                                                                                         |  |      
|               |  |                                                                                                 |   | The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K.                                                                      |  | 37-38
|               |  |                                                                                                 |   | Exhibits 10.1, 10.2, 10.3 and 10.4 constitute the management contracts and compensatory plans and arrangements required to be filed as exhibits to this Annual Report on Form 10-K pursuant to Item 14(c) hereof. |  |      
|(b)            |  | Reports on Form 8-K.                                                                            |   |                                                                                                                                                                                                                  
|               |  | No reports on Form 8-K were filed by the registrant during the quarter ended December 31, 2001. |   |                                                                                                                                                                                                                  
|notes thereto. |  |                                                                                                 |   |                                                                                                                                                                                                                   |  |      

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

|                                                            |  |   |         | Column B |    | Column C |   |    |          |    
|----------------------------------------------------------- |  | - | ------- | -------- | -- | -------- | - | -- | -------- | ---
|
|
|
|
|Year ended December 31, 2001:
Allowance for possible losses |  | $ | 496,569 |          | ($ | 17,670   | ) | $  |         |    
|                                                            |  |   |         |          |    |          |   |    |          |    
|Year ended December 31, 2000:
Allowance for possible losses |  | $ | 767,456 |          | $  | 221,004  |   | ($ | 264,743) | (a)
|                                                            |  |   |         |          |    |          |   |    |          |    
|Year ended December 31, 1999:
Allowance for possible losses |  | $ | 498,669 |          | $  | 339,743  |   | $  |         |    
|                                                            |  |   |         |          |    |          |   |    |          |    

---

35

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SIGNATURES

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

|P & F INDUSTRIES, INC.(Registrant)
|----------------------------------
|By:                               

Date:
March 28, 2002

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

|Name                                      |  | Title    |  | Date          
|----------------------------------------- |  | -------- |  | --------------
|                                          |  |          |  |               
|/s/ROBERT L. DUBOFSKYRobert L. Dubofsky   |  | Director |  | March 28, 2002
|Alan Goldberg                             |  | Director |  |               
|/s/RICHARD A. HOROWITZRichard A. Horowitz |  | Director |  | March 28, 2002
|/s/SIDNEY HOROWITZSidney Horowitz         |  | Director |  | March 28, 2002
|/s/ARTHUR HUG, JR.Arthur Hug, Jr.         |  | Director |  | March 28, 2002
|/s/DENNIS KALICKDennis Kalick             |  | Director |  | March 28, 2002
|/s/NEIL NOVIKOFFNeil Novikoff             |  | Director |  | March 28, 2002
|/s/ROBERT M. STEINBERGRobert M. Steinberg |  | Director |  | March 28, 2002
|/s/MARC A. UTAYMarc A. Utay               |  | Director |  | March 28, 2002

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EXHIBIT INDEX

|Exhibit
No.: |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1          |  | Asset Purchase Agreement, dated as of September 16, 1998, by and between Green Manufacturing, Inc., an Ohio corporation, and the Registrant (Incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated September 16,
1998). Pursuant to Item 601(b)(2) of Regulation S-K, the Registrant agrees to furnish, supplementally, a copy of any exhibit or schedule omitted from the Asset Purchase Agreement to the Commission upon request.   
|3.1          |  | Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999).                                                                                                                                                                                                                                                                                
|3.2          |  | Amended By-laws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).                                                                                                                                                                                                                                                                                                      
|4.1          |  | Rights Agreement, dated as of August 23, 1994, between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated August 24,
1994).                                                                                                                                                                                                                     
|4.2          |  | Amendment to Rights Agreement, dated as of April 11, 1997, between the Registrant and American Stock Transfer & Trust Company, as Rights Agent (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated April 11,
 1997).                                                                                                                                                                                                               
|4.3          |  | Credit Agreement, dated as of July 23, 1998, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy Industries, Inc., a New York corporation, and European American Bank, a New York banking corporation
(Incorporated by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998).                                                                           
|4.4          |  | Amendment No. 1 to Credit Agreement, dated as of September 16, 1998, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy Industries, Inc., a New York corporation, Green Manufacturing, Inc., a
Delaware corporation, and European American Bank, a New York banking corporation (Incorporated by reference to Exhibit 4.4 to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998).
|4.5          |  | Amendment No. 2 to Credit Agreement, dated as of July 28, 1999, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy Industries, Inc., a New York corporation, Green Manufacturing, Inc., a Delaware
corporation, and European American Bank, a New York banking corporation (Incorporated by reference to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).            
|4.6          |  | Amendment No. 3 to Credit Agreement, dated as of July 26, 2000, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy Industries, Inc., a New York corporation, Green Manufacturing, Inc., a Delaware
corporation, and European American Bank, a New York banking corporation (Incorporated by reference to Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).            
|             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

37

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|4.7  |  | Amendment No. 4 to Credit Agreement, dated as of June 25, 2001, by and among the Registrant, Florida Pneumatic Manufacturing Corporation, a Florida corporation, Embassy Industries, Inc., a New York corporation, Green Manufacturing, Inc., a Delaware
corporation, and European American Bank, a New York banking corporation (Incorporated by reference to Exhibit 4.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.8  |  | Certain instruments defining the rights of holders of the long-term debt securities of the Registrant are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant agrees to furnish supplementally copies of these
instruments to the Commission upon request.                                                                                                                                                                        
|10.1 |  | Second Amended and Restated Employment Agreement, dated as of May 30, 2001, between the Registrant and Richard A. Horowitz (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001).                                                                                                                                                                                                          
|10.2 |  | Consulting Agreement, effective as of November 1, 2000, between the Registrant and Sidney Horowitz (Incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
2000).                                                                                                                                                                                                                             
|10.3 |  | 1992 Incentive Stock Option Plan of the Registrant, as amended and restated as of March 13, 1997 (Incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31,
1998).                                                                                                                                                                                                                             
|10.4 |  | Executive Incentive Bonus Plan of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                      
|21   |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|23   |  | Consent of the Registrant's Independent Certified Public Accountants                                                                                                                                                                                                                                                                                                                                                                                                   

A
copy of any of the foregoing exhibits to this Annual Report on Form 10-K may be obtained, upon payment of the Registrant's reasonable expenses in furnishing such
exhibit, by writing to P & F Industries, Inc., 300 Smith Street, Farmingdale, New York 11735-1114; Attention: Corporate Secretary.

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