General

The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking statements made by or on behalf of P&F Industries, Inc. and subsidiaries ("P&F", or "the Company"). P&F and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. Generally, the inclusion of the words "believe," "expect," "intend," "estimate," "anticipate," "will," and their opposites and similar expressions identify statements that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. Any forward-looking statements contained herein, including those related to the Company's future performance, are based upon the Company's historical performance and on current plans, estimates and expectations. All forward-looking statements involve risks and uncertainties. These risks and uncertainties could cause the Company's actual results for the 2009 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company for a number of reasons, as previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 in response to Item 1A to Part I of Form 10-K. Forward-looking statements speak only as of the date on which they are made. 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.

Business

P&F conducts its business operations through two of its wholly-owned subsidiaries: Continental Tool Group, Inc. ("Continental") and Countrywide Hardware, Inc. ("Countrywide"). P&F and its subsidiaries are herein referred to collectively as the "Company." In addition, the words "we", "our" and "us" refer to the Company.

Further, P&F operates in two primary lines of business, or segments: (i) tools and other products ("Tools") and (ii) hardware and accessories ("Hardware").

Tools

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

Florida Pneumatic is engaged in the importation, manufacture and sale of pneumatic hand tools, primarily for the industrial, retail and automotive markets, and the importation and sale of compressor air filters. Florida Pneumatic also markets, through its Berkley Tool division ("Berkley"), a line of pipe cutting and threading tools, wrenches and replacement electrical components for a widely-used brand of pipe cutting and threading machines. In addition, through its Franklin Manufacturing ("Franklin") division, Florida Pneumatic imports a line of door and window hardware. Hy-Tech is primarily engaged in the manufacture and distribution of pneumatic tools and parts for industrial applications.

Hardware

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

Nationwide is an importer and manufacturer of door, window and fencing hardware. Woodmark is an importer of builders' hardware, including staircase components and kitchen and bath hardware and accessories. Pacific Stair, until mid-2008, manufactured premium stair rail products. Since the closing of its mill in 2008, it now operates as a distributer of Woodmark's staircase components to the building industry, primarily in southern California and the southwestern region of the United States.

Critical Accounting Policies and Estimates

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

There have been no material changes in our critical accounting policies and estimates from those discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.

RESULTS OF OPERATIONS



Quarters ended March 31, 2009 and 2008



Revenue



The table below provides an analysis of our revenue.



                      Three-months Ended March 31,
                          2009              2008         Variance     Variance
                                                            $            %
Tools
Florida Pneumatic   $      4,709,000    $  8,907,000   $ (4,198,000 )    (47.1 )%
Hy-Tech                    4,436,000       4,379,000         57,000        1.3
Tools Total         $      9,145,000    $ 13,286,000   $ (4,141,000 )    (31.2 )%

Hardware
Woodmark            $      3,878,000    $  6,438,000   $ (2,560,000 )    (39.8 )%
Pacific Stair                315,000         471,000       (156,000 )    (33.1 )
Nationwide                 2,224,000       4,130,000     (1,906,000 )    (46.2 )
Hardware Total      $      6,417,000    $ 11,039,000   $ (4,622,000 )    (41.9 )%

Consolidated        $     15,562,000    $ 24,325,000   $ (8,763,000 )    (36.0 )%

All revenues are generated in U.S. dollars and are not impacted by changes in foreign currency exchange rates.

Tools

When comparing the three-month periods ended March 31, 2009 and 2008, net revenue reported by our Tools segment decreased $4,141,000. Significant components to the reduction in revenue at Florida Pneumatic include the loss of The Home Depot business resulting in a decrease in net revenue of $2,647,000 and decreased shipments to its major retail customer of $454,000. Additionally, revenue from its industrial / catalog and OEM product lines were $1,039,000 and $562,000, respectively, compared to sales in the three-month period ended March 31, 2008 of $1,336,000 and $847,000, respectively. Lastly, we continue to see weakening sales in our Franklin products line, which decreased $488,000 when comparing the three-month period ended March 31, 2009 revenue of $306,000 to $794,000 reported in the same period in the prior year. Other than the loss of revenue from The Home Depot, we believe the key factor to the fall-off in revenue at Florida Pneumatic is the result of the slowing overall economy. The Company's relationships with its customers remain healthy, given the current economic conditions.

Hy-Tech however, continued to provide a positive impact to the Tools segment. Hy-Tech focuses on the industrial sector of the pneumatic tools market, an area which thus far has not been as affected by an overall sluggish economy compared to the retail sector. However, beginning late in the first quarter of 2009, we began to see indications of a slow down in the industrial sector. As illustrated in the table above, when comparing the three-month periods ended March 31, 2009 and 2008, Hy-Tech, reported a modest increase of $57,000. This increase is primarily attributable to organic growth. Hy-Tech's relationships with its customers remain healthy, given the current economic conditions.

Hardware

As a result of the continuing reduction in the number of new homes being constructed, which is the principal driver for the Hardware segment, revenue for the three-month period ended March 31, 2009 decreased an aggregate of $4,622,000 when compared

to the three-month period ended March 31, 2008. Specifically, our Woodmark subsidiary, which primarily markets its stair parts to the southern tier of the United Sates, continues to be hard hit, reporting an aggregate net revenue decrease of $2,560,000. Based upon United States Census Bureau statistics, the average number of single family home starts for the three-month period ended March 31, 2009 was 356,000 compared to the average for the three-month period ended March 31, 2008 of 728,000, indicating a 51.1% decrease. Within Woodmark, revenue for the three-month period ended March 31, 2009 for its stair parts and accessories a product line decreased $1,962,000 to $3,027,000, from $4,989,000 reported in the same period in the prior year. This decrease is primarily due to the diminished number of new housing starts and the loss of a major customer. Additionally, Woodmark's kitchen and bath products line revenue for the first quarter of fiscal 2009 was $851,000 compared to revenue of $1,449,000 reported during the three-month period ended March 31, 2008. The decrease in its kitchen and bath product line revenue of $598,000 was due primarily to one of its major customers filing for bankruptcy, a diminishing recreational vehicle market, which is a key customer group as well as the weak economic conditions. Until the downward trend in the number of new housing starts levels and begins to increase, we do not expect to see improvement in Woodmark's net revenue. As illustrated in the table above, Pacific Stair Products located in Southern California reported a decrease in its net revenue of $156,000 to $315,000 reported for the three-month period ended March 31, 2009 from $471,000 reported for the same period in the prior year. This continuing fall-off is primarily attributable to continuing decline in the new home construction market in southern California and Arizona. Nationwide, which primarily markets fencing and gate hardware, is also feeling the impact of the housing downturn. Additionally, its results are being impacted by the overall economic sluggishness as well as competitive pressures. As such, Nationwide reported fiscal 2009 first quarter revenue of $2,224,000, compared to $4,130,000 reported in the same period in the prior year. Within Nationwide, net revenue from its fencing, OEM and Patio product were $1,624,000, $429,000 and $171,000, respectively, compared to $3,048,000, $750,000 and $332,000, respectively for the same period in the prior year. We anticipate that we will likely continue to see the affects of the sluggish economy and lagging new home starts along with competitive pressures on future revenue for the remainder of 2009.

Gross Margins / Profits



Gross profits for the three-month periods ended March 31, 2009 and 2008:



Three months ended March 31,                   Consolidated       Tools       Hardware
            2009               Gross Profit   $    4,631,000   $ 3,200,000   $ 1,431,000
                               Gross Margin             29.8 %        35.0 %        22.3 %

            2008               Gross Profit   $    7,672,000   $ 4,411,000   $ 3,261,000
                               Gross Margin             31.5 %        33.2 %        29.5 %

Tools

Gross margins in the Tools segment increased 1.8 percentage points to 35.0% for the three-month period ended March 31, 2009 from 33.2% for the three-month period ended March 31, 2008. However, gross profit for this segment decreased $1,211,000 as a result of the decrease in revenue. Specifically, Florida Pneumatic's gross margin decreased 0.8 percentage points and, combined with reduced revenue, had a decrease in gross margin of $1,389,000. Product mix was the primary factor contributing to the gross profit slippage. Both gross margin and gross profit increased at Hy-Tech when comparing the three-month periods ended March 31, 2009 and 2008. Gross margins increased approximately 3.6 percentage points to 45.4% for the three-month period ended March 31, 2009, from 41.8% reported for the same period in the prior year. In combination with the increased revenue, Hy-Tech's gross profit increased approximately $502,000 during the same period. These increases reported in this quarter are primarily due to product mix as well as improved manufacturing efficiencies. While Hy-Tech's gross margin for the first quarter of 2009 was favorable in relation to the same period in the prior year, we do not expect these relative results to continue as a slow down in the industrial sector of our Tools segment began toward the end of the first quarter of 2009.

Hardware

The overall gross margin for the Hardware segment continues to be adversely affected by the downturn in home construction. For the three-month period ended March 31, 2009, the aggregate gross margin for the Hardware segment was 22.3% reflecting a decrease of 7.2 percentage points when compared to 29.5% for the same period in the prior year. Gross profit for the Hardware segment decreased $1,830,000 to $1,431,000 reported for the three-month period ended March 31, 2009 from $3,261,000 for the same period in 2008. Specifically, gross margins for the stair parts business as well as the kitchen and bath business at Woodmark decreased 6.4 and 7.7 percentage points, respectively, when comparing the three-month periods ended March 31, 2009 and 2008. Factors affecting Woodmark's overall gross margins were increases in inventory reserves and lower absorption of fixed warehouse costs that resulted from lower revenue, as well as selling price concessions. The gross margin decrease, combined with lower revenue, resulted in an aggregate reduction of gross profit at Woodmark of $997,000. Gross margin for the three-month period ended March 31, 2009 at

Pacific Stair continued to decrease primarily the result of under absorption of its fixed manufacturing overhead costs, which in turn, is due primarily to decreased sales volume. For the three-month period ended March 31, 2009, Pacific Stair Products incurred a gross margin deficit of 23.0% compared to a gross margin deficit of 12.0 % reported for the same three-month period in 2008. As a result, Pacific Stair Products generated gross deficits of $73,000 and $56,000, respectively for the three-month periods ended March 31, 2009 and 2008. Gross margins at Nationwide decreased 6.4 percentage points to 29.0% for the three-month period ended March 31, 2009 from 35.4% reported for the same period in 2008. The gross margin decrease was primarily due to product mix, current competitive conditions and overseas pricing. Combined with decreased revenue, its gross profit decreased $816,000 to $645,000 for the three-month period ended March 31, 2009 compared to $1,461,000 for the same three month period in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, ("SG&A") include salaries and related costs, commissions, travel, administrative facilities, communications costs and promotional expenses for our direct sales and marketing staff, administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead and certain engineering expenses.

For the three-month period ended March 31, 2009, our SG&A was $5,041,000, reflecting a decrease of $1,469,000 or 22.6% when compared to $6,510,000 for the three-month period ended March 31, 2008. Significant components of the decrease include reductions in compensation, payroll taxes and benefits of $645,000, depreciation and amortization expenses decreased $139,000 as the result of the impairment charges taken in 2008. Additionally, the following items also decreased; freight by $297,000, commissions by $244,000, promotional expenses by $181,000, warranty by $62,000, and travel and entertainment expenses by $62,000. Offsetting the above reductions in our operating expenses, during the three-month period ended March 31, 2008 we received $165,000, as reimbursement of legal fees and other costs related to the settlement of formerly outstanding litigation. We intend to continue to examine our operating expenses, particularly during these difficult times. However, as a significant portion of these expenses are fixed, as a percentage of revenue, SG&A was 32.4% for the three-month period ended March 31, 2009 compared to 26.8% for the same period in the prior year.

Interest - Net

Our net interest expense of $309,000 for the three-month period ended March 31, 2009 reflects a decrease of $249,000, or 44.6%, when compared to net interest expense of $558,000 incurred for the same period in the prior year. Interest expense decreased $91,000 and $90,000, respectively, on the term loans associated with the Woodmark and Hy-Tech acquisitions, principally the result of lower average borrowings during the period due to repayments, as well as slightly lower average interest rates. Interest expense on borrowings under our revolving credit loan facility for the three-month period ended March 31, 2009 was $138,000, compared to $187,000 for the same period in 2008, a decrease of $49,000, due primarily to lower interest rates, partially offset by higher average loan balances. Our total average debt balances under the terms of our credit facilities with our banks for the quarters ended March 31, 2009 and 2008 were $27,691,000 and $32,291,000, respectively. The total average interest rate for the quarters ended March 31, 2009 and 2008 were 3.96% and 6.49%, respectively. Interest expense on trade payables financed with overseas suppliers at Florida Pneumatic decreased approximately $12,000, primarily the result of changes in both certain overseas vendors and, in some cases, vendor payment terms. Interest paid on two mortgages decreased an aggregate of $14,000.

Income Taxes

The effective tax rates applicable to earnings from continuing operations for the quarters ended March 31, 2009 and 2008 were 17.0% and 42.1%, respectively. The primary factor affecting our effective tax rate applied at March 31, 2009, was state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our cash flows from operations can be somewhat cyclical, typically with the greatest demand in the second and third quarters followed by positive cash flows in the fourth quarter as receivables and inventories trend down. We monitor average days sales outstanding, inventory turns and capital expenditures to project liquidity needs and evaluate return on assets employed.

We gauge our liquidity and financial stability by various measurements some of which are shown in the following table:

                        March 31, 2009     December 31, 2008
Working Capital        $     12,961,000            16,491,000
Current Ratio                 1.43 to 1             1.61 to 1
Shareholders' Equity   $     33,331,000   $        33,867,000

We entered into a Credit Agreement, ("Credit Agreement") as amended, with two banks ("banks") in 2004. In March 2009, the banks amended the Credit Agreement to, among other things; increase the revolving credit loan facility, to a maximum of $22,000,000 for direct borrowings, with various sublimits for letters of credit, bankers' acceptances and equipment loans. There are no commitment fees for any unused portion of this Credit Agreement. The revolving credit loan facility portion of the Credit Agreement, as amended, expires March 30, 2010 and is subject to annual review by the lending banks. Direct borrowings under the revolving credit loan facility are secured by our accounts receivable, inventory and equipment and are cross-guaranteed by each of our subsidiaries. These borrowings bear interest at LIBOR (London InterBank Offered Rate) plus the currently applicable loan margin, or the prime interest rate. At March 31, 2009 and December 31, 2008, the applicable loan margins added to LIBOR was 3.50%. Further, at March 31, 2009 and December 31, 2008, the balances outstanding on the revolving credit loan facility were $20,000,000 and $15,000,000, respectively.

Additionally, as part of the amendment entered into in March 2009, the banks agreed to cancel and refinance two term loans, which immediately prior to the amendment aggregated approximately $13,200,000. One term loan had a balance of $6,000,000 and was being repaid $950,000 quarterly through June 2010 with a final payment of $300,000 payable in September 2010. The second term loan had a balance immediately prior to the amendment of approximately $7,200,000 payable in quarterly installments of $360,000 through January 2014. Both term loans incurred interest at LIBOR plus the applicable loan margin. The amendment created one new term loan in the amount of $7,116,000 with the balance of $6,084,000 added to the revolving credit loan facility. The new term loan expires March 30, 2012. Further, the new term loan requires us to make monthly principal installment payments, which aggregate to approximately $1,780,000, annually, compared to previous installment payments required under the two cancelled term loans which had required us to make aggregate payments of $5,240,000, annually. Borrowings under the new term loan facility are secured by our accounts receivable, inventory and equipment and are cross-guaranteed by each of our subsidiaries. These borrowings bear interest at LIBOR plus the currently applicable loan margin, or the prime interest rate. At March 31, 2009 the new term loan balance was $7,116,000 with applicable loan margin added to LIBOR of 3.75%. At December 31, 2008, the two term loans then in existence aggregated approximately $13,560,000, and had applicable loan margin added LIBOR of 3.75%.

The Credit Agreement also includes a foreign exchange line, which provides for the availability of up to $10,000,000 in foreign currency forward contracts. These contracts fix the exchange rate on future purchases of foreign currencies needed for payments to foreign suppliers. The total amount of foreign currency forward contracts outstanding under the foreign exchange line at March 31, 2009, based on that day's closing spot rate, was approximately $194,000.

Under the terms of the credit agreement, we are required to adhere to certain financial covenants. At March 31, 2009, we were not in compliance with one of these financial covenants. Subsequent to March 31, 2009, the banks waived non-compliance with such financial covenant.

Our cash decreased $321,000, from $1,043,000 as of December 31, 2008 to $722,000 as of March 31, 2009. Our debt levels decreased to $29,371,000 at March 31, 2009 from $30,544,000 at December 31, 2008, due primarily to a term loan repayment and lower inventory purchases during the quarter ended March 31, 2009. The total percent of debt to total book capitalization (total debt divided by total debt plus equity) was 46.8% at March 31, 2009 compared to 47.4% at December 31, 2008.

We had net cash of $1,437,000 provided by operating activities of continuing operations for the three-month period ended March 31, 2009 compared to net cash of $1,181,000 used in operating activities of continuing operations for the three-month period ended March 31, 2008. We believe that cash on hand derived from operations and cash available through borrowings under our credit facilities should be sufficient to allow us to meet our foreseeable working capital needs.

In connection with the acquisition of Hy-Tech, we agreed to make additional payments ("Contingent Consideration") to the sellers. The amount of the Contingent Consideration is to be based on a percentage of the average increase in earnings before interest, taxes, depreciation and amortization ("EBITDA") over a two-year period from the date of acquisition, February 12, 2007, over a base year EBITDA of $4,473,000. In addition, we agreed to make an additional payment ("Additional Contingent Consideration"), subject to certain conditions related to an exclusive supply agreement with a major customer and, to a certain extent, and subject to certain provisions, the achievement of Contingent Consideration. The maximum amount of Additional Contingent Consideration may not exceed $1,900,000. Hy-Tech has successfully achieved the required thresholds necessary to be entitled to both the Contingent Consideration and the Additional Contingent Consideration. The total amount of the Contingent Consideration and the Additional Contingent Consideration is approximately $2,300,000. According to the agreement, the amounts due the sellers are payable in May 2009. However, we are currently negotiating payment terms with the sellers which will permit us to make installment payments commencing in May 2009. Any additional payments made to the Hy-Tech sellers referred to above will be treated by us as additions to goodwill.

Capital spending was approximately $567,000 and $189,000 for the three-month periods ended March 31, 2009 and 2008, respectively. Capital expenditures for the balance of 2009 are expected to be approximately $500,000, some of which may be financed through our credit facilities or financed through independent third party financial institutions. Included in the expected total for 2009 are capital expenditures relating to new products, expansion of existing product lines and replacement of equipment.

A former wholly-owned subsidiary participated in a multi employer pension plan until it sold substantially all of its operating assets in October 2005. This plan provided defined benefits to all of its union workers. Contributions to this plan were determined by the union contract. The former wholly-owned subsidiary does not administer the plan funds and does not have any control over the plan funds. As a result of former wholly-owned subsidiary's withdrawal from the plan, it recorded the net present value of a withdrawal liability of approximately $369,000, which is payable in quarterly installments of approximately $8,200 from May 2006 through February 2026. The balance at March 31, 2009 and December 31, 2008 was $325,000 and $331,000, respectively and is reported in Liabilities of Discontinued Operations. Further, in connection with our sale of Embassy, we recorded the net present value of a receivable of approximately $90,000, which is scheduled to be collected at approximately $8,200 per quarter from May 2006 through May 2009.

OFF-BALANCE SHEET ARRANGEMENTS

Our foreign exchange line provides for the availability of up to $10,000,000 in foreign currency forward contracts. These contracts fix the exchange rate on future purchases of foreign currencies needed for payments to foreign suppliers. We have not purchased forward contracts on New Taiwan dollars ("TWD"). The total amount of foreign currency forward contracts outstanding at March 31, 2009, based on that day's closing spot rate, was approximately $194,000.

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