Our industry is highly fragmented, and as such, we add considerable value to the industry by purchasing products from a large number of manufacturers and then distributing the products and offering a range of services to our customer base on conditions that are more favorable than these customers could obtain on their own.

As of December 31, 20072008 we operated 281288 sales centers in North America and Europe.

We believe that the swimming pool industry is relatively young, with room for continued growth from increased penetration of new pools. Of the approximately 70 million homes in the United States that have the economic capacity and the yard space to have a swimming pool, approximately 12% own a pool. Higher rates of new home construction from 1996 to 2005 have added to the market expansion opportunity for pool ownership, particularly in larger pool markets.

We believe the long-term prospects of our industry are positively impacted by favorable demographic and socioeconomic trends.  This includes the expected continued long-term growth in housing units in warmer markets due to the population migration towards the south and the need to maintain the growing installed base of pools. The industry has also been positively impacted by the trend for increased homeowner spending on outdoor living spaces for relaxation and entertainment. Additionally, consumers frequently bundle the purchase of a pool with other products as part of a complete backyard makeover. New irrigation systems and landscaping are often key components to completing a swimming pool installation or remodel. The irrigation and landscape market has many characteristics in common with the pool industry, and we believe that it benefits from the same favorable demographic and socioeconomic trends and will realize long-term growth rates similar to the pool industry.

The majority of consumer spending in our industry is derived from the non-discretionary maintenance of existing swimming pools, including the repairmaintenance and replacementrepair of the equipment for those pools. We believe that the recurring nature of the repairmaintenance and replacementrepair market has helped maintain a relatively consistent rate of industry growth historically, evenand has helped cushion the negative impact on revenues in periods when unfavorable economic conditions and negative trendssoftness in the housing market adversely impact pool construction activities.  The table below reflects growth in the domestic installed base of in-ground and above-ground swimming pools over the past 10 years (based on Company estimates and information from 2007 P.K. Data, Inc. reports):

Our industry is seasonal and weather is one of the principal external factors that affectsaffect our business. Peak industry activity occurs during the warmest months of the year, typically April through September.  Unseasonable warming or cooling trends can delay or accelerate the start or end of the pool and landscape season, impacting our maintenance and repair sales. These impacts at the shoulders of the season are generally more pronounced in northern markets.  Weather also impacts our sales of construction and installation products to the extent above average precipitation, late spring thaws in northern markets and other extreme weather conditions delay, interrupt or cancel current or planned construction and installation activities.

The industry is also affected by other factors including, but not limited to, consumer attitudes toward pool and landscape products for environmental or safety reasons.

Our mission is to provide exceptional value to our customers and suppliers, in order to provide exceptional return to our shareholders while providing exceptional opportunities to our employees. Our three core strategies are to promote the growth of our industry, to promote the growth of our customers’ businesses and to continuously strive to operate more effectively.

In addition to our efforts aimed at industry and customer growth, we strive to operate more effectively by continuously focusing on improvements in our operations such as product sourcing, procurement and logistics initiatives, adoption of enhanced business practices and improved working capital management.

Based upon industry data, we believe the industry grew at a 2% to 6% annual rate for the period between 2000 and 2005 but declined inbetween 2006 and 2007.2008.  Historically, our sales growth has exceeded the industry’s growth rates and allowed us to increase market share. We expect our sales growth to be higher than the industry average due to increases in market share and expansion of our product offerings.

For additional discussion of our recent acquisitions, see Note 2 and Note 14 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K. We intend to pursue additional strategic acquisitions, which will allow us to further penetrate existing markets and expand into new geographic markets and product categories.

We serve roughly 70,000 customers, none of which account for more than 1% of our sales. We primarily serve five types of customers:

The majority of these customers are small, family owned businesses with relatively limited capital resources.  The current economic environment has had the greatest impact on swimming pool remodelers and builders and landscape construction companies.  We have seen a modest contraction in our customer base in these segments over the last two years.

We conduct our operations through 281288 sales centers in North America and Europe. Our primary markets, which have the highest concentration of swimming pools, are California, Florida, Texas and Arizona, representing approximately 54%55% of our net sales in 2007.2008. We use a combination of local and international sales and marketing personnel to promote the growth of our business and develop and strengthen our customers’ businesses. Our sales and marketing personnel focus on developing customer programs and promotional activities, creating and enhancing sales management tools and providing product and market expertise. Our local sales personnel work from the sales centers and are charged with understanding and meeting our customers’ specific needs.

We offer our customers more than 100,000 national brand and Pool Corporation private label products. We believe that our selection of pool equipment, supplies, chemicals, replacement parts, irrigation and landscape products and complementary products is the most comprehensive in the industry. The products we sell can be categorized as follows:

Our maintenance, repair and replacement partsproducts are categorized into maintenance and minor repair (non-discretionary) and major repair and refurbishment (partially discretionary) product groupings.  Since maintenance and repair products are primarily non-discretionary in nature, meaning that these items must be purchased by end-usersend users to maintain existing swimming pools and landscaped areas. OverIn 2008, approximately 60% of our sales and gross profits arewere derived from the sale of maintenance and repair products used to maintain and repair these existing features and less thanapproximately 40% arewere derived from the replacement, construction and installation (equipment, materials, plumbing, electrical, etc.) of new pools and landscaping.  We distribute irrigationThis reflects a shift toward more sales of maintenance and landscaperepair products throughdue to the significant declines in new pool construction over the past three years.  Historically, just over 50% of our Horizon Distributors (Horizon) network, which we acquired through acquisitions in 2005total sales and 2006.gross profits were related to maintenance and repair products.

OurIncluding sales related to our March 2008 acquisition of National Pool Tile Group, Inc. (NPT), our complementary product sales accounted for over 9%approximately 11% of our total net sales in 20072008 at comparable margins to our traditional product offerings. While complementary product sales excluding NPT decreased 3%15% in 20072008 due primarily to the downturn in new pool and irrigation construction, complementary product sales have been an important factor in our base business sales growth over the past eight years, having grownand increased from approximately $3.0 million in 1999 to over $180.0$156.0 million in 2007.2008.  With our acquisition of NPT in March 2008, our focus in 2009 will be expanding the number of sales center locations that offer NPT’s pool tile and composite pool finish products.

We have identifiedcontinue to identify other product categories that could become part of our complementary product offerings in the future. We typically introduce two to three categories each year in certain markets. We then evaluate the performance of these test categories and focus on those which we believe exhibit long-term growth potential. In 2008, weWe intend to continue to expand our complementary products initiative by increasing the number of locations which offer complementary products, increasing the number of complementary products offered at certain locations and continuing a modest broadening of the product offerings on a company-wide basis.

We operate three distribution networks: the SCP Distributors (SCP) network, the Superior Pool Products (Superior) network and the Horizon network. The SCP network consists of 157167 sales centers, including 11 locations12 sales centers in Europe, the Superior network consists of 62 locations60 sales centers and the Horizon network also consists of 62 locations.61 sales centers.

We distribute swimming pool supplies, equipment and related leisure products through our SCP and Superior networks, and we distribute irrigation and landscape products through our Horizon network. We adopted the strategy of operating two distinct distribution networks within the swimming pool marketplace primarily for two reasons:

We evaluate our sales centers based upon their performance relative to predetermined standards that include both financial and operational measures. Our corporate support groups provide our field operations with various services including customer and vendor related programs, information systems support and expert resources to help them achieve their goals. We believe our incentive programs and feedback tools, along with the competitive nature of our internal networks, stimulate and enhance employee performance.

Our sales centers are located near customer concentrations, typically in industrial, commercial or mixed-use zones. Customers may pick up products at any sales center location, or products may be delivered via our trucks or third party carriers.

Our sales centers maintain well-stocked inventories to meet customers’ immediate needs. We utilize warehouse management technology to optimize receiving, inventory control, picking, packing and shipping functions.

In addition, we operate fiveseven centralized shipping locations and foursix stand-alone construction materials centers that redistribute products we purchase in bulk quantities to our sales centers or directly to customers.

We enjoy good relationships with our suppliers, who generally offer competitive pricing, return policies and promotional allowances. It is customary in our industry for manufacturers to seasonally offer extended payment terms to qualifying purchasers such as POOL. These terms are typically available to us for pre-season or early season purchases.

We initiated a preferred vendor program in 1999 which encourages our buyers to purchase products from a smaller number of vendors. We work closely with these vendors to develop programs and services to better meet the needs of our customers and concentrate our purchasing activities. These practices, together with a more comprehensive service offering, have resulted in improved margins at the sales center level.

We regularly evaluate supplier relationships and consider alternate sourcing to assure competitive cost, service and quality standards. Our largest suppliers include Pentair Corporation, Hayward Pool Products, Inc. and Zodiac Pool Care,Systems, Inc., which accounted for approximately 15%, 11%10% and 9%, respectively, of the cost of products we sold in 2007.

Based on industry knowledge and available data, management believes we are the largest wholesale distributor of swimming pool and related backyard products and the only truly national wholesale distributor focused on the swimming pool industry in the United States. We are also one of the top three distributors of landscape and irrigation products in the United States, and we compete against one national wholesale distributor of these products. We face intense competition from many regional and local distributors in our markets and to a lesser extent, mass-market retailers and large pool supply retailers with their own internal distribution networks.

Some geographic markets we serve, particularly our four largest, higher density markets in California, Florida, Texas and Arizona, are more competitive than others. Barriers to entry in our industry are relatively low. We compete with other distributors for rights to distribute brand-name products. If we lose or are unable to obtain these rights, we might be materially and adversely affected. We believe that the size of our operations allows us to compete favorably for such distribution rights.

We believe that the principal competitive factors in swimming pool and landscape supply distribution are:

We believe that we generally compete favorably with respect to each of these factors.

For a discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.

Our business is subject to regulation under local fire codes and international, federal, state and local environmental and health and safety requirements, including regulation by the Environmental Protection Agency, the Consumer Product Safety Commission, the Department of Transportation, the Occupational Safety and Health Administration, the National Fire Protection Agency and the International Maritime Organization. Most of these requirements govern the packaging, labeling, handling, transportation, storage and sale of chemicals and fertilizers. We store certain types of chemicals and/or fertilizers at each of our sales centers and the storage of these items is strictly regulated by local fire codes. In addition, we sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws. These laws are primarily related to labeling, annual registration and licensing.

We employed approximately 3,5003,400 people at December 31, 2007.2008. Given the seasonal nature of our business, our peak employment period is the summer, when we add approximately 500 more employees to our work force to meet seasonal demand.

We maintain both domestic and foreign registered trademarks primarily for our private label products that are important to our current and future business operations. We also own rights to several Internet domain names.

Net sales by geographic region were as follows for the past three fiscal years (in thousands):

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at www.poolcorp.com as soon as reasonably practical after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission.

Additionally, we have adopted a Code of Business Conduct and Ethics, applicable to all employees, officers and directors, which is available free of charge on our website.

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management’s plans and objectives, future contracts, and forecasts of trends and other matters. Forward-looking statements speak only as of the date of this filing, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as “anticipate”, “estimate”, “expect”, “believe,” “will likely result,” “outlook,” “project” and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

In economic downturns, the demand for swimming pool or leisure related products may decline as discretionary consumer spending, the growth rate of pool eligible households and swimming pool construction decline.  Although maintenance products and repair and replacement equipment that must be purchased by pool owners to maintain existing swimming pools currently account for more than 60%80% of our net sales and gross profits, the growth of this portion of our business depends on the expansion of the installed pool base and could also be adversely affected by decreases in construction activities similar to the trends in 2007.2007 and 2008.  A weakening economy may also cause deferrals of discretionary replacement and refurbish activity.  In addition, even in generally favorable economic conditions, severe and/or prolonged downturns in the housing market could have a material adverse impact on our financial performance.  Such downturns expose us to certain additional risks, including but not limited to the risk of customer closures or bankruptcies, which could shrink our potential customer base and inhibit our ability to collect on those customers’ receivables.

Weather is one of the principal external factors affecting our business. For example, unseasonably late warming trends in the spring or early cooling trends in the fall can shorten the length of the pool season. Also, unseasonably cool weather or extraordinary rainfall during the peak season can decrease swimming pool use, installation and maintenance, as well as landscape installations and maintenance. These weather conditions adversely affect sales of our products. For a discussion regarding seasonality and weather, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality and Quarterly Fluctuations,” of this Form 10-K.

As a distribution company, maintaining favorable relationships with our suppliers is critical to the success of our business. We believe that we add considerable value to the swimming pool supply chain and landscape supply chain by purchasing products from a large number of manufacturers and distributing the products to a highly fragmented customer base on conditions that are more favorable than these customers could obtain on their own. We believe that we currently enjoy good relationships with our suppliers, who generally offer us competitive pricing, return policies and promotional allowances. However, our inability to maintain favorable relationships with our suppliers could have an adverse effect on our business.

Our largest suppliers are Pentair Corporation, Hayward Pool Products, Inc. and Zodiac Pool Care,Systems, Inc., which accounted for approximately 15%, 11%10% and 9%, respectively, of the costs of products we sold in 2007.2008. A decision by several suppliers, acting in concert, to sell their products directly to retail customers and other end-users of their products, bypassing distribution companies like ours, would have an adverse effect on our business. Additionally, the loss of a single significant supplier due to financial failure or a decision to sell exclusively to other distributors, retail customers or end user consumers could also adversely affect our business. We dedicate significant resources to promote the benefits and affordability of pool ownership, which we believe greatly benefits our swimming pool customers and suppliers.

We face competition from both inside and outside of our industry. Within our industry, we compete against various regional and local distributors and, to a lesser extent, mass market retailers and large pool or landscape supply retailers. Outside of our industry, we compete with sellers of other leisure product alternatives, such as boats and motor homes, and with other companies who rely on discretionary homeowner expenditures, such as home remodelers. New competitors may emerge as there are low barriers to entry in our industry. Some geographic markets that we serve, particularly our four largest, higher density markets in California, Florida, Texas and Arizona, representing approximately 54%55% of our net sales in 2007,2008, also tend to be more competitive than others.

Mass market retailers today carry a limited range of, and devote a limited amount of shelf space to, merchandise and products targeted to our industry. Historically, mass market retailers have generally expanded by adding new stores and product breadth, but their product offering of pool and landscape related products has remained relatively constant.  Should mass market retailers increase their focus on the pool or professional landscape industries, or increase the breadth of their pool and landscape related product offerings, they may become a more significant competitor for direct and end-use customers which could have an adverse impact on our business. We may face additional competitive pressures if large pool or landscape supply retailers look to expand their customer base to compete more directly within the distribution channel.

We consider our employees to be the foundation for our growth and success. As such, our future success depends in large part on our ability to attract, retain and motivate qualified personnel, including our executive officers and key management personnel. If we are unable to attract and retain key personnel, our operating results could be adversely affected.

We have experienced substantial sales growth through acquisitions, market share gains and new sales center openings that have increased our size, scope and geographic distribution. During the past five fiscal years, we have opened 3931 new sales centers (net of subsequent closings and consolidations of new sales centers) and have completed 119 acquisitions. These acquisitions have added 6469 sales centers, net of sales center closings and consolidations within one year of acquisition, and athree centralized shipping locationlocations to our distribution networks. In 2007 and 2008, we also closed 6 existing sales centers. While we contemplate continued growth through acquisitions and internal expansion, no assurance can be made as to our ability to:

If we do not manage these potential difficulties successfully, our operating results could be adversely affected.

We also promote the growth of our customers’ businesses through comprehensive support programs that offer promotional tools and marketing support to help generate increased sales for our customers. Our programs include such thingsfeatures as personalized websites, brochures, marketing campaigns and business development training. We also provide certain retail store customers with assistance in site selection, store layout and design and business management system implementation. Our inability to sufficiently develop effective advertising, marketing and promotional programs to succeed in a weakened economic environment and an increasingly competitive marketplace, in which we (and our entire supply chain) also compete with other luxury product alternatives, could have a material adverse effect on our business.

In 2007,2008, approximately 65%67% of our net sales and over 100% of our operating income were generated in the second and third quarters of the year, which represent the peak months of swimming pool use, installation, remodeling and repair. Our sales are substantially lower during the first and fourth quarters of the year, when we may incur net losses.

We are subject to regulation under federal, state and local environmental, health, transportation and safety requirements, which govern such things as packaging, labeling, handling, transportation, storage and sale of chemicals and fertilizers. For example, we sell algaecides and pest control products that are regulated as pesticides under the Federal Insecticide, Fungicide and Rodenticide Act and various state pesticide laws. These laws are primarily related to labeling, annual registration and licensing.

Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties or the imposition of injunctive relief. Moreover, compliance with such laws and regulations in the future could prove to be costly, and there can be no assurance that we will not incur such costs in material amounts. These laws and regulations have changed substantially and rapidly over the last 20 years and we anticipate that there will be continuing changes. The clear trend in environmental, health, transportation and safety regulation is to place more restrictions and limitations on activities that impact the environment, such as the use and handling of chemical substances. Increasingly, strict restrictions and limitations have resulted in higher operating costs for us and it is possible that the costs of compliance with such laws and regulations will continue to increase. We will attempt to anticipate future regulatory requirements that might be imposed and we will plan accordingly to remain in compliance with changing regulations and to minimize the costs of such compliance.

We store chemicals and fertilizers, including certain combustible, oxidizing compounds, at our sales centers. A fire, explosion or flood affecting one of our facilities could give rise to fire, safety and casualty losses and related liability claims. We maintain what we believe is prudent insurance protection. However, we cannot guarantee that our insurance coverage will be adequate to cover future claims that may arise or that we will be able to maintain adequate insurance in the future at rates we consider reasonable. Successful claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage.

Our international operations expose us to certain additional risks, including:

We source certain products we sell, including our private label products, from Asia and other international sources. There is a greater risk that we may not be able to access products in a timely and efficient manner, and we may also be subject to certain trade restrictions that prevent us from obtaining products. Fluctuations in other factors relating to international trade, such as tariffs, currency exchange rates, transportation costs and inflation are additional risks for our international operations.

Discretionary spending on leisure product offerings such as ours is generally adversely affected during times of economic or political uncertainty. The potential for terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility could create these types of uncertainties and negatively impact our business for the short or long-term in ways that cannot presently be predicted.

We lease the POOL corporate offices, which consist of approximately 50,000 square feet of office space in Covington, Louisiana, from an entity in which we have a 50% ownership interest. We own three sales centerscenter facilities in Florida and one sales center in Texas. We lease all of our other properties and the majority of our leases have three to seven year terms. As of December 31, 2007,2008, we had seven leases that expire between 2018 and 2027. Most of our leases contain renewal options, some of which involve rent increases. In addition to minimum rental payments, which are set at competitive rates, certain leases require reimbursement for taxes, maintenance and insurance.

Our sales centers range in size from approximately 2,000 square feet to 100,000 square feet and generally consist of warehouse, counter, display and office space. Our centralized shipping locations (CSLs) and construction materials centers range in size from 16,000 square feet to 132,000 square feet.

We believe that our facilities are well maintained, suitable for our business and occupy sufficient space to meet our operating needs. As part of our normal business, we regularly evaluate sales center performance and site suitability and may relocate a sales center or consolidate two locations if a sales center is redundant in a market, under performing or otherwise deemed unsuitable. We do not believe that any single lease is material to our operations.

From time to time, we are subject to various claims and litigation arising in the ordinary course of business, including product liability, personal injury, commercial, contract and employment matters.  While the outcome of any litigation is inherently unpredictable, we do not believe, based on currently available facts, that the ultimate dispositionresolution of any of these matters will have a material adverse impact on our financial condition, results of operations or cash flows. 

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2007.2008.

The table below sets forth selected financial data from the Consolidated Financial Statements. You should read this information in conjunction with the discussions in Item 7 of this Form 10-K and with the Consolidated Financial Statements and accompanying Notes in Item 8 of this Form 10-K.

In these challenging times, we have focused on business improvement opportunities, maintaining tight control over costs and strengthening our commitment to programs and initiatives that will provide long-term value to customers, suppliers and shareholders.  Our 2007 financial2008 results were negatively impacteddemonstrate our progress towards achieving these objectives as evidenced by a difficult combination of external conditions, particularly the depressed housingour gross margin expansion, our improved cost structure and real estate markets which intensified throughoutincreased cash provided by operations compared to 2007. Falling home values across much of the country and tightening credit markets created a significant drop in new construction activities. Unfavorable weather conditions also had an adverse impact during the first half of 2007, both on

Net sales of construction products and on maintenance and repair products.  Extended winter conditions delayed the start of the pool season in the Central and Northeast regions.  Record wet weather in Texas and Oklahoma caused decreases across customer types, greatly hindering construction and installation activities and affecting replacement and repair activities.  Considering the magnitude of these unfavorable external trends, we believedecreased 8% as our sales performance compares favorably to 2006remained pressured by the unprecedented adverse market and indicateseconomic conditions impacting our success in gaining market share and improving our competitive position.

Our grossGross profit as a percentage of net sales (gross margin) decreased 80improved 140 basis points to 28.9% in 2008 from 27.5% in 2007 compared to 2006. This decrease reflects the impact of competitive pricing pressures resulting from the current market environment and unfavorable comparisons to 2006 gross margin.  In 2006, our2007.  The increase in 2008 gross margin is primarily attributable to improved by 40 basis points over 2005 due to benefits from our supply chainpricing management, initiatives including pre-pricean increase purchases in the fourth quartersales of 2005preferred vendor and the second quarter of 2006.Pool Corporation private label products and a favorable shift in product mix.

Selling and administrative expenses (operating expenses) for 2008 increased 7%1% compared to 2006. This increase includes the addition of expenses from the Wickham acquisition in August 2006, investments in 29 new sales centers opened since the beginning of 2006, an increase in bad debt expense, higher2007 due to operating expenses related to existing sales center expansionsacquired businesses.  Base business operating expenses decreased 3% year over year, due primarily to the impact from continued cost control initiatives and relocations and higher freight costs. These higher expenses were partially offset by lower incentive compensation and the impact of cost control initiatives.compensation.

Our operatingOperating income decreased 20%14% to $133.8$115.5 million in 20072008 while operating income as a percentage of net sales (operating margin) decreasedwas down slightly to 6.4% in 2008 compared to 6.9% from 8.8% in 2006.2007.  Interest expense increased 46% for 2007decreased $3.2 million, or 15%, due primarily to higher debt levels for borrowings to fund share repurchases and a higherlower weighted average effective interest rate compared to the same period in 2006.  Net2007.

Earnings per share for 2008 was $1.18 per diluted share on net income decreased 27% to $69.4of $57.0 million, compared to 2006 and included $0.9$1.37 per diluted share on net income of $69.4 million in 2007.  Included in 2008 earnings per share is the adverse impact of net equity earningsa loss of $0.04 per diluted share from our equity interest investment in Latham Acquisition Corporation (LAC).  By comparison, this investment contributed income of $0.02 per diluted share in 2007.  Our first quarter 2008 acquisitions had a dilutive impact of $0.02 per diluted share in 2008.

Cash provided by operations increased $2.6$21.6 million to $71.6$93.3 million in 20072008 due primarily to the favorable impactsimpact from changes in working capital balances, which offset the decrease in net income.

Our accounts receivable balanceTotal net receivables decreased 9%18% to $115.6 million at December 31, 2008 from $141.1 million at December 31, 2007 due to the lower sales, lower vendor receivables, an increase in the allowance for doubtful accounts and a shift toward more cash sales as a result of tighter credit terms.  Our allowance for doubtful accounts balance was $13.7 million at December 31, 2008, an increase of $3.8 million over December 31, 2007.  We increased the allowance for doubtful accounts in the second half of 2008 to reflect an increase in our total past due receivable balances year over year.  Days sales outstanding (DSO) increased between periods toremained steady at 36.3 days at December 31, 20072008 and December 31, 2007.

Our inventory levels increased 7% to $405.9 million as of December 31, 2008 compared to 35.0 days at$379.7 million as of December 31, 2006.  Our allowance for doubtful accounts increased to $9.9 million at December 31, 2007 from $4.9 million at December 31, 2006.2007.  This increase reflects slower payments from customers in markets that have been adversely impacted by the decline in new poolapproximately $17.1 million of acquired inventory, primarily related to NPT, and irrigation construction.

Total debt outstanding increaseddecreased to $327.8 million at December 31, 2008 compared to $350.9 million at December 31, 20072007.  Our current ratio increased to 2.1 as of December 31, 2008 compared to $265.4 million at1.8 as of December 31, 2006. This increase is attributable to increased borrowings to fund our 2007 share repurchases and slightly higher working capital levels. We continue to maintain a healthy current ratio of 1.8, which was unchanged from December 31, 2006.2007.

CurrentContinuing adverse economic trends have significantly impacted our industry.  These trends include a slowdown in the domestic housing market, with lower housing turnover, a sharp drop in new home construction, home value deflation in many markets decreases in short-term interest rates and a significant tightening of consumer and commercial credit.  Some of the factors that help mitigate the impact of these trends on our business include the following:

Despite these mitigating factors, these negative trends have significantly impacted a number of our key markets, including California, Florida and Arizona, with a modest and more recent adverse impact in Texas. We estimate that these trends resulted in the following decreases in new pool construction between 2005 and 2008:

We believe these decreases represent the first three year decline in new pool construction in our industry history.  Since these trends worsened throughout 2007 and 2008, they had a more pronounced impact during 2007 and have significantly impacted some ofon our key markets, including Florida, Arizona and parts of California. Weresults for the year ended 2008 compared to the same period in 2007.  Given the current economic conditions, we believe these trends along with the impact of unusually wet weathercould continue into 2009.  This may result in Texas and Oklahoma and a delay in the start of pool construction in northern markets due to unfavorable weather conditions, resulted in a decrease in new pool construction of approximately 50,000 units, or 25%, in 2007. This followed a decrease of approximately 10,000 units, or 5%, in 2006, representing the first back to back decrease in recent industry history.  A continuation or worsening of these trends may have an even greater impact on new pool construction and consumer spending on outdoor living spaces, which could negatively impact our sales and earnings.

OurBuilding on the progress we have made, our 2009 objectives remain focused on strengthening our market leading positions, further improving our gross margin and expanding our cost improvement initiatives.  We will also focus on rebalancing our inventories following the opportunistic inventory purchases that we made in 2008 include:

We believe that the prolonged downturn in real estate marketsongoing housing market and restricted access to credit, coupled with the uncertain general economic environment,downturns will continue to adversely impactpressure new pool and irrigation construction.construction activity.  However, we expect a relatively stable maintenance market based on the increased installed based of swimming pools.  Based on lower projected customer early buy purchases compared to the first quarter of 2008, we expect to see some shift of sales from the first quarter to the second quarter of 2009.

We anticipate mid to high single digit inflationary product cost increases that we expect to pass through the supply chain.  Given the ongoing difficult external environment, we will continue to focus on striking an appropriate balance on the extension of credit and maintaining a prudent cost structure.  We expect labor costs to decrease slightly compared to 2008 based on cost savings related to our recent headcount reductions and the fact that we have frozen salaries across the board in 2009.  Similar to 2008, we expect to realize equity losses from our investment in LAC in 2009 as their business faces sales pressures on their pool construction products.  Excluding any acquisition activity, we do not expect to increase the number of sales centers in 2009. Given the challenges in the external environment, we will not provide any earnings per share guidance until we gain more visibility for how our 20082009 results are tracking.

We expect to generate sufficient cash flow and have adequate access to capital to both fund our business objectives and provide a direct return to our shareholders inother priorities for the formuse of dividend payments.cash.

Our business isThe forward-looking statements in this outlook section are subject to significant risks and uncertainties, including changes in the economy and the housing market, the sensitivity of our business to weather conditions, our ability to maintain favorable relationships with suppliers and manufacturers, competition general economic conditionsfrom other leisure product alternatives and mass merchants, and other risks as detailed in Item 1A of this Form 10-K.

We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. We believe the following critical accounting estimates require us to make the most difficult, subjective or complex judgments.

We maintain an allowance for doubtful accounts for an estimate of the losses we will incur if our customers do not make required payments. We perform periodic credit evaluations of our customers and typically do not require collateral. Consistent with industry practices, we generally require payment from our customers within 30 days except for sales under early buy programs for which we provide extended payment terms to qualified customers. The extended terms usually require payments in equal installments in April, May and June or May and June, depending on geographicalgeographic location. Credit losses have generally been within or better than our expectations.

As our business is seasonal, our customers’ businesses are also seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. We provide reserves for uncollectible accounts based on the accounts receivable aging ranging from 0.1% for amounts currently due up to 100% for specific accounts more than 60 days past due.

At the end of each quarter, we perform a reserve analysis of all accounts with past due balances greater than $20,000. Additionally, we perform a separate reserve analysis on the balance of our accounts receivables with emphasis on the remainder of the past due portion of the aging. As we review these past due accounts, we evaluate collectibility based on a combination of factors, including:

During the year, we write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. Such write-offs are charged against our allowance for doubtful accounts. In the past five years, write-offs have averaged approximately 0.1%0.2% of net sales.sales annually.  In 2008, write-offs were 0.3% of net sales, reflecting a trend related to the negative impacts on some of our customer’s businesses due to the difficult external environment.

If the balance of the accounts receivable reserve increased or decreased by 20% at December 31, 2007,2008, pretax income would change by approximately $1.2$2.7 million and earnings per share would change by approximately $0.02$0.03 per diluted share based on the number of diluted shares outstanding at December 31, 2007.2008.

Product inventories represent the largest asset on our balance sheet. Our goal is to manage our inventory such that we minimize stock-outs to provide the highest level of service to our customers. To do this, we maintain at each sales center an adequate inventory of stock keeping units (SKUs) with the highest sales volume. At the same time, we continuously strive to better manage our slower moving classes of inventory, which are not as critical to our customers and thus, inherently have lower velocity. Sales centers classify products into 13 classes based on sales at that location over the past 12 months. All inventory is included in these classes, except for non-stock special order items and products with less than 12 months of usage. The table below presents a description of these inventory classes:

There is little risk of obsolescence for products in classes 1-4 because products in these classes generally turn quickly. We establish our reserve for inventory obsolescence based on inventory classes 5-13, which we believe represent some exposure to inventory obsolescence, with particular emphasis on SKUs with the least sales over the previous 12 months. The reserve is intended to reflect the value of inventory that we may not be able to sell at a profit. We provide a reserve of 5% for inventory in classes 5-13 and non-stock inventory as determined at the sales center level. We also provide an additional 5% reserve for excess inventory in classes 5-12 and an additional 45% reserve for excess inventory in class 13. We determine excess inventory, which is defined as the amount of inventory on hand in excess of the previous 12 months usage, on a company-wide basis.

In evaluating the adequacy of our reserve for inventory obsolescence, we consider a combination of factors including:

OurWe periodically adjust our reserve for inventory obsolescence may periodically require adjustment as changes occur in the above-identified factors.

If the balance of our inventory reserve increased or decreased by 20% at December 31, 2007,2008, pretax income would change by approximately $0.7$1.7 million and earnings per share would change by approximately $0.01$0.02 per diluted share based on the number of diluted shares outstanding at December 31, 2007.2008.

Throughout the year, we estimate the amount of the incentive earned based on our estimate of cumulative purchases for the fiscal year relative to the purchase levels that mark our progress toward earning the incentives. We accrue vendor incentives on a monthly basis using these estimates provided that we determine they are probable and reasonably estimable. Our estimates for cumulative purchases and sales of qualifying products are driven by our sales projections, which can be significantly impacted by a number of external factors including weather and changes in economic conditions. Changes in our purchasing mix also impact our incentive estimates, as incentive rates can vary depending on our volume of purchases from specific vendors. We continually revise these estimates throughout the year to reflect actual purchase levels and identifiable trends. As a result, our estimated quarterly vendor incentive accruals may include cumulative catch-up adjustments to reflect any changes in our estimates between reporting periods.

If market conditions were to change, vendors may change the terms of some or all of these programs. Although such changes would not affect the amounts we have recorded related to products already purchased, they may lower or raise our gross margins for products purchased and sold in future periods.

We record deferred tax assets or liabilities based on differences between the financial reporting and tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when we expect the differences to reverse. Due to changing tax laws and state income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.

We have operations in 38 states and seven7 foreign countries. The amount of income taxes we pay is subject to adjustment by the applicable tax authorities. We are subject to regular audits by federal, state and foreign tax authorities. Our estimate for the potential outcome of any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. These adjustments may include differences between the estimated deferred tax liability that we have recorded for equity earnings in unconsolidated investments and the actual taxes paid upon the return of undistributed equity earnings through a manner other than a capital transaction. As a result of these uncertainties, our total income tax provision may fluctuate on a quarterly basis.

We have an incentive compensation structure designed to attract, motivate and retain employees. Our incentive compensation packages include bonus plans that are specific to each group of eligible participants and their levels and areas of responsibility. The majority of our bonus plans have annual cash payments that are based primarily on objective performance criteria, with a component based on management’s discretion. We calculate bonuses as a percentage of salaries based on the achievement of certain key measurable financial and operational results, including budgeted operating income and diluted earnings per share. We generally make bonus payments at the end of February following the most recentrecently completed fiscal year.

TheManagement sets the objectives for our bonus plans are set at the inceptionbeginning of the bonus plan year using both historical information and forecasted results of operations for the current plan year. The Compensation Committee of our Board approves these objectives for certain bonus plans. We record an incentive compensation accrual at the end of each month using management’s estimate of the total overall incentives earned based on the amount of progress achieved towards the stated bonus plan objectives. During the third and fourth quarters and as of our fiscal year end, we adjust our estimated incentive compensation accrual based on our detailed analysis of each bonus plan, the participants’ progress toward achievement of their specific bonus plan objectives and management’s estimates related to the discretionary components of the bonus plans. Due to both the discretionary components of the bonus plans and the timing of the approval and payment of the annual bonuses, ourOur estimated quarterly incentive compensation expense and accrual balances may vary relative to actual annual bonus expense and payouts.payouts due to the following:

Our largest intangible asset is goodwill. At December 31, 2007,2008, our goodwill balance was $155.2$169.6 million, representing 19%20% of total assets. Goodwill represents the excess of the amount we paid to acquire a company over the estimated fair value of tangible assets and identifiable intangible assets acquired, less liabilities assumed.

Our goodwill impairment test requires a comparison of the estimated fair value of each reporting unit to its carrying value, including goodwill. We estimate the fair value of our reporting units based on a discounted cash flow approach,by utilizing fair value models, which requiresrequire us to make several assumptions about projected future cash flows, discount rates and appropriate discount rates.multiples.  In order to determine the reasonableness of the assumptions included in our fair value calculations, we compare the total estimated fair value for all aggregated reporting units to our market capitalization on the date of our impairment test.  We also review for potential impairment indicators at the reporting unit level based on a detailed evaluation of recent historical operating trends, current and projected local market conditions and other relevant factors as appropriate.  If our assumptions or estimates change, we could incur impairment charges in future periods forwhich would decrease operating income and result in lower asset values on our balance sheet.  For example, a change in the estimated discount rate of 1% could have resulted in the fair value of our United Kingdom reporting unit falling below its carrying value.  Our United Kingdom reporting unit had a goodwill impairment.balance of $7.1 million at December 31, 2008.  We have 198 other reporting units with goodwill balances.  For these reporting units, the highest goodwill balance is $5.7 million and the average goodwill balance is $0.8 million.

In October 2007,2008, we completedperformed our annual goodwill impairment test.  As a result of this test, we determined that the goodwill attributed to one of our Ohio sales centers was impaired.  Based on the current and projected economic conditions in this market and fixed cost obligations related to an unfavorable long-term lease for this sales center facility, we determined that the estimated fair value for this reporting unit was less than its carrying value.  As a result, we performed additional impairment testing to determine the implied fair value of this reporting unit’s goodwill.  Since the implied fair value of goodwill was less than the carrying value, we wrote-off the $0.4 million goodwill balance related to this reporting unit.  This impairment expense is recorded in selling and administrative expenses on the Consolidated Statements of Income.  Based on our annual goodwill impairment test, we determined that the goodwill attributed to our other reporting units is not impaired.

Using the criteria listed above, we determined that there was no impairment.impairment of our equity method investments as of December 31, 2008.  If there are changes in LAC’s financial projections or the factors we consider in performing our evaluations, there could be indicators of a potential decrease in the value of our investments that may result in other-than-temporary impairments.

For information about recent accounting pronouncements, see Note 1 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

The table below summarizes information derived from our Consolidated Statements of Income expressed as a percentage of net sales for the past three fiscal years:

The following table breaks out our consolidated results into the base business component and the acquired and new market componentexcluded components (sales centers excluded from base business):

We exclude the following sales centers from ourFor an explanation of how we calculate base business, results for a periodplease refer to the discussion of 15 months:base business beginning on page 24 under the heading “Fiscal Year 2008 compared to Fiscal Year 2007”.

For information about our recent2007 and 2006 acquisitions, see Note 2 of “Notes to Consolidated Financial Statements,” included in Item 8 of this Form 10-K.

The increase in net sales is primarily a result of the Wickham acquisition and sales from new locations that we opened in new markets. Base business sales decreased 1% compared to 2006 as sales declines for products used in new pool and irrigation construction were not fully offset by the solid sales growth for maintenance, repair and replacementMRR products and our international operations.

Demand for pool and irrigation construction products was impacted by the weak housing market, tightening credit markets and unfavorable weather conditions. New pool construction permits declined significantly throughout 2007, especially in our key Florida, Arizona and California markets. Net sales were also adversely impacted by the competitive pricing pressures experienced in the currentdifficult market environment.

Our sales growth for maintenance, repair and replacementMRR products was primarily due to the following:

Complementary product sales decreased 3% year over year compared to a 26% increase from 2005 to 2006. Our complementary product sales were adversely impacted by the declines in new construction activity, but benefited from our expansion of complementary product offerings and an increase in the number of sales centers that now offer complementary products.

Gross margin decreased 80 basis points compared to 2006, including a consistent decline in base business gross margin.

Our 2007 gross margin is comparatively lower primarily due to the following impacts:impacts (listed in order of estimated magnitude):

Total operating expenses grew 7% and increased 110 basis points as a percentage of net sales compared to 2006, while base business operating expenses were 4% higher and increased 100 basis points as a percentage of net sales. These increases reflect the following:following (listed in order of estimated magnitude):

These increased costs were partially offset by lower incentive expenses and the impact from cost control initiatives.

We opened 12 new sales centers in 2007 compared to 17 new sales centers in 2006.

Interest expense increased $7.0 million between periods as average debt outstanding was 41% higher in 2007 compared to 2006. The higher debt levels in 2007 reflect increased borrowings to fund share repurchases. The weighted average effective interest rate also increased to 6.0% in 2007 from 5.8% in 2006.

Income taxes decreased to $43.2 million in 2007 from $58.8 million in 2006 due to the $40.6 million decrease in income before income taxes and equity earnings. Our effective income tax rate was 38.66% at December 31, 2007 and 38.61% at December 31, 2006.

Net income decreased to $69.4 million in 2007 from $95.0 million in 2006.  Our equity interest in LAC produced $0.9 million of net earnings in 2007 compared to $1.6 million in 2006.  Earnings per share for 2007 decreased to $1.37 per diluted share compared to $1.74 in 2006. The decrease includes the impact of approximately $0.16 per diluted share related to the incremental operating expenses for new sales centers opened since January 2006.  By comparison, the impact of incremental operating expenses for new sales centers opened in 2006 was approximately $0.06 per diluted share last year.in 2006. In both 2007 and 2006, earnings per share benefited from the reduction of our weighted average shares outstanding due to the impact of our share repurchase activities.