UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended November 30, 2007May 31, 2008

OR

Commission File Number 0-21161

Q.E.P. CO., INC.

(Exact name of registrant as specified in its charter)

(561) 994-5550

(Registrant’s telephone number, including area code)

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  x    No  ¨

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

Large Accelerated filer  ¨    Accelerated filer  ¨    Non-Accelerated filer  x

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

The number of shares outstanding of each of the registrant’s classes of common stock as of JanuaryJuly 11, 2008 is 3,433,363 shares of Common Stock, par value $0.001 per share.

Q.E.P. CO., INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

Q.E.P. CO., Inc. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

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

Q.E.P. CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

(Unaudited)

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

Q.E.P. CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

Q.E.P. CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – Interim Reporting

The accompanying financial statements for the interim periods are unaudited and include the accounts of Q.E.P. Co., Inc. and its subsidiaries, which are collectively referred to as “we”, “us”, “our”, “Q.E.P.” or “the Company”. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by US generally accepted accounting principles for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended February 28, 200729, 2008 (“fiscal 2007”2008”). The results of operations for the quarter ended May 31, 2008, are not necessarily indicative of the results to be expected in future quarters or for the year ending February 28, 2009. All significant intercompany transactions have been eliminated.

Our fiscal year ends on February 29, 200828, 2009 (“fiscal 2008”2009”). All references to the first second and third quarter of fiscal 20082009 are to the quarter ended May 31, August 31 and November 30, 2007, respectively.2008.

Q.E.P. Co., Inc. is a leading manufacturer, marketer and distributor of a broad line of specialty tools and flooring related products for the home improvement market. Under brand names including Q.E.P.®, ROBERTS®, Capitol®, QSet^™, Vitrex® and Elastiment^™, the Company markets specialty tools and flooring related products used primarily for the surface preparation and installation of ceramic tile, carpet, vinyl and wood flooring. The Company markets approximately 3,000 products in the US, Canada, Europe, Australia, Latin America and Asia. The Company sells its products primarily to large home improvement retail centers, as well as traditional distribution outlets in all of the markets it serves.

NOTE B – Sale of Businesses

On May 4, 2007, the Company entered into agreements with Bon Tool Co., a US supplier of construction tools, equipment and decorative concrete products, for the sale of the business, inventory and certain intangible assets of the Company’s O’Tool operation, and the sublease of the warehouse space previously occupied by the O’Tool operation. Proceeds for the sale are required to be paid over a period of one year, subject to specified minimum and maximum payments, based on the gross margin realized by the purchaser upon the sale of purchased inventory. The sale proceeds are collateralized by a first priority lien on unsold inventory. The assets sold consist mainly of inventory with a cost of approximately $1.3 million at May 31, 2007. During the first quarter of fiscal 2008, the Company recorded a loss on the sale of the O’Tool operation of less than $0.1 million, which is recorded in other expense. This transaction was not disclosed as a discontinued operation due to the immateriality of the transaction to the Company’s overall operation.

On July 18, 2007, the Company entered into an asset purchase agreement with ParexLahabra, a manufacturer of premixed mortars for the construction industry, for the sales of the business, accounts receivable, inventory and certain intangible assets of the Company’s Stone Holdings operation. The sale proceeds were approximately $2.4 million in cash and the Company recorded a gain on the sale of the Stone Holdings operation of approximately $0.6 million in the second quarter of fiscal 2008, which is recorded in other income. This transaction was not disclosed as a discontinued operation due to the immateriality of the transaction to the Company’s overall operation.

In fiscal 2007, the Company entered into a license and royalty agreement with Estillon B.V., a European supplier of carpet specialty tools, granting Estillon the rights to manufacture, market and distribute products using the Company’s Roberts® and Smoothedge® brand names to customers, other than mass merchants, within certain continental European countries. On October 24, 2007, the Company expanded its license and royalty agreement with Estillon B.V to include Great Britain and Ireland. At the same time,

additional agreements were executed with Estillon whereby Estillon purchased inventory and accounts receivable from the Company in exchange for cash. The Company recorded a charge of $0.3 million for the write-off of the Roberts UK ‘s accumulated foreign currency translation adjustment during the third quarter of fiscal 2008, which is recorded in general and administrative expenses. This transaction did not qualify for treatment as a discontinued operation due to the Company’s continued involvement in the market through the license and royalty agreement. For the nine months ended November 30, 2007, the Company recorded royalty income of $0.1 million related to the arrangement with Estillion in continental Europe.

NOTE C – Purchase of Property, Plant and Equipment

On September 28, 2007, the Company purchased a manufacturing and distribution facility situated on 5.8 acres of land in the City of Adelanto, San Bernardino County, California. The Company intends to relocate its current leased distribution facility in Henderson, Nevada, when the lease expires in January 2008. The Company paid approximately $2.0 million for the Adelanto facility utilizing funds available to the Company under its existing revolving credit facility. The purchase price and other related costs, which totaled $0.1 million, were allocated to land, building and machinery in the amounts of $0.4 million, $1.3 million and $0.4 million, respectively.

NOTE D – Inventories

Inventories consisted of the following (in thousands):

NOTE EC – Goodwill and Other Intangible Assets

Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), intangible assets with definite lives are amortized or expensed while intangibles with indefinite lives, such as goodwill, are tested annually for impairment or when events or changes in circumstances indicate the carrying value may not be recoverable. The Company performs an impairment test on goodwill during the second quarter of each fiscal year. The Company performed an impairment test duringin the second quarter ofprevious fiscal 2008 andyear determined that there was no impairment to goodwill. The impairment test in the previous fiscal year resulted in a second quarter impairment charge of $7.6 million, which was subsequently adjusted to $7.5 million in the third quarter of fiscal 2007.goodwill and other intangible assets. The Company will continue to assess the impairment of goodwill and other intangible assets in accordance with SFAS No. 142 in the future. If the Company’s operating performance and resulting cash flows in the future are less than expected, an additional impairment charge could be incurred which may have a material impact on the Company’s results of operations.

As of November 30, 2007,May 31, 2008, the Company hashad $6.5 million of goodwill in the Domestic segment, $1.0 million in the Canada segment, $0.3$0.4 million in the Europe segment and $1.7$1.8 million in the Australia/New Zealand segment. No goodwill remains in the Other segment.

All other intangible assets are subject to amortization. The total balance of definite-lived intangible assets is classified as follows (in thousands):

				May 31, 2008										February 29, 2008
		Weighted Avg Useful Life		Gross Carrying Amount			Accumulated Amortization				Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization				Net Carrying Amount
Trademarks		20		$	3,089		$	(1,210	)		$	1,879		$	3,081		$	(1,165	)		$	1,916
Other intangibles		5			1,429			(649	)			780			1,419			(618	)			801
				$	4,518		$	(1,859	)		$	2,659		$	4,500		$	(1,783	)		$	2,717

The Company incurred approximately $0.1 million and $0.2 million of amortization expensecost for trademarks and other intangibles in the three and nine months ended November 30, 2007.May 31, 2008. The Company expects to incur a total of approximately $0.3 million of amortization expensecost for trademarks and other intangibles in fiscal 2008.2009. Other intangibles include customer lists, non-compete agreements and patents.

NOTE FD – Deferred Costs

The Company records the upfront consideration given to customers as deferred costs within the noncurrent assets classification. These deferred costs are expensed as a reduction to sales over the term of the contract, currently approximately three years. As of May 31, 2008, the Company had deferred costs of $3.2 million. No deferred costs were recorded as of February 29, 2008. The Company evaluates the impairment of deferred cost assets on a quarterly basis.

The Company expensed approximately $0.3 million of deferred costs in the three months ended May 31, 2008. The Company expects to expense approximately $1.5 million of deferred costs in fiscal 2009.

NOTE E – Debt

Revolving Credit Facility

The Company has an asset based loan agreement with two domestic financial institutions to provide a revolving credit facility, mortgage and term note financing. In March 2005,May 2008, the Company amended the facility to consolidateextend the Company’s term notes and increasematurity date for the amount of borrowing capacity to $27 million through February 2006 and $29 million thereafterrevolving credit facility and the mortgage on the Canadian facility to May 20, 2011. The amendment revised the loan agreement so that the loan agreement will no longer provide for the BV loan or term loan and will consist solely of the revolving credit loan and mortgage on the Canadian facility. The amendment also made the following modifications to the loan agreement: (i) all foreign subsidiaries other than Roberts Company Canada Limited were released as borrowers under the loan agreement, (ii) all foreign subsidiaries excluding all subsidiaries in Canada, the U.K., France, Australia and New Zealand executed negative pledge agreements, and (iii) the covenants relating to the maintenance of a minimum current ratio and a minimum tangible net worth were eliminated. The total amount available for borrowing under the revolving facility usingcredit loan, the same formula for eligible accounts receivableinterest rate applicable to the borrowings outstanding and inventory that previously existed forall other covenants under the Company. The revolving facility was also extended to July 2008.loan agreement remain unchanged from the loan agreement, as amended by prior amendments. These loans are collateralized by substantially all of the Company’s assets. The agreement also prohibits the Company from incurring certain additional indebtedness, limits certain investments, advances or loans, restricts substantial asset sales and capital expenditures and prohibits the payment of dividends, except for dividends due on the Company’s Series A and C preferred stock. The loan agreement contains a subjective acceleration clause and a mandatory lockbox arrangement; therefore, the borrowing under this agreement is classified as a current liability.

On April 26, 2007, the loan agreement was amended to make certain financial covenants from February 28, 2007 through JulyAt May 31, 2008 less restrictive and to increase the ability of the Company to borrow against eligible inventory of raw material and finished goods of the Company and certain subsidiaries.

At November 30, 2007, the rate for the revolving loan facility was Libor (4.82% as of November 30, 2007)(2.83%) plus 1.75% and the Company had borrowed approximately $24.7$23.5 million and had $2.4 million available for future borrowings under theits revolving loan facility net of approximately $0.7$0.6 million in outstanding letters of credit.

International Credit Facilities

The Company’s Australian subsidiary has a payment facility that allows it to borrow against a certain percentage of inventory and accounts receivable. In March 2007, this facility was amended to make the maximum permitted borrowing approximately $1.8$2.0 million of which $1.3$1.4 million was outstanding at November 30, 2007.May 31, 2008. The facility is considered a demand note and carries an interest rate of the Australian Commercial Bill Rate (7.36%(7.94% as of November 30, 2007)May 31, 2008) plus 1.25%.

In connectionThe Company’s U.K. subsidiary has an asset based loan agreement with a domestic financial institution to provide a revolving credit facility with a borrowing capacity of $3.5 million for the Company’s U.K. operations. The facility has a term that varies with the purchaseterm of the assets of Vitrex Ltd., the Company’s United Kingdom subsidiary entered into two financing arrangements with HSBC Bank in the United Kingdom. The first financing arrangement allows for borrowing upother domestic revolving credit facility and bears an interest rate that ranges from Sterling Libor plus 1.50% to £1.0 million (approximately US $2.1 million) based on the advancement of up to 80% of the value of accounts receivable. In addition, the subsidiary may borrow up to £0.4 million (approximately US $0.8 million) against the value of the inventory. Both of these facilities areSterling Libor plus 2.25%. This agreement is collateralized by substantially all of the Company’s UK operation’s assets and is guaranteed by the Company. The agreement similarly prohibits the Company’s U.K. operations from incurring certain additional indebtedness, limits certain investments, advances or loans, restricts substantial asset sales and capital expenditures, and prohibits the payment of dividends. At May 31, 2008 the subsidiary (approximately $7.1 million) as well as a parent company guaranty. On November 30, 2007, $2.3 million was borrowed under these facilities. Both are considered short-term demand notes and have an interest rate ofwas Sterling Libor (6.09% as of November 30, 2007)(5.46%) plus 2.00%. The Company’s U.K. operations had borrowed approximately $2.2 million under this facility and had $0.1 million available for future borrowing. The facility is considered a demand note.

Term Loan Facilities

As discussed previously, in March 2005, the Company amended its domestichad a term loan agreements by consolidating the then existing two term facilities into one three year term facility. In addition, the Company received approximately $3.0 million of additional term financing arrangement under the amendment. The amendment providesasset based loan agreement that provided for repayment of this facility at a rate of approximately $0.2 million per month at an interest ratemonth. The term loan was fully repaid during the first quarter of Libor plus 2.13% to Libor plus 2.63% through April 2008. The amendment also formally released the Company’s Chairman and Chief Executive Officer of his guaranty of one of the term loans. In June 2006, the loan agreements were amended to increase the interest rate range from Libor plus 2.13% to Libor plus 2.88%. The balance on this term note was $0.8 million at November 30, 2007.fiscal 2009.

In March 2007, the Company’s Australian subsidiary amended its payment facility by consolidating the then existing three term facilities into one three-year term facility. The subsidiary received approximately $1.3 million of additional financing under the amendment. The loan requires quarterly payments of AUD 0.2 million (US $0.2 million) for the first four installments and AUD 0.1 million (US $0.1 million) thereafter with a final balloon payment. The balance of this term note was US $1.6$1.3 million at November 30, 2007.May 31, 2008. The term loan is collateralized by substantially all of the assets of the subsidiary (approximately $13.1$12.4 million) as well as a parent company guaranty.

Mortgage Facility

In July 2003, the Company refinanced its mortgage loan in Canada to finance the expansion of the Canadian physical facilities. In May 2008, the Company entered into an agreement with its existing lenders to renew the Canadian mortgage for an additional three years. As of November 30, 2007,May 31, 2008, the mortgage balance was $1.9 million.$1.8 million and is amortized based on a 15-year period. The mortgage bears an interest rate of Libor (5.00%(3.21% as of November 30, 2007)May 31, 2008) plus 2.00% and will mature in September 2008.May 2011. The mortgage loan requires payments of less than $0.1 million per month. As a result ofOn June 10, 2008, the maturity date being within one year,company amended its loan facility to draw down an additional CAD 0.5 million (US$ 0.5 million) under the existing Canadian mortgage. The payments continue to be less than $0.1 million per month.

In February 2008, the Company reclassifiedentered into a mortgage agreement to finance the entire mortgage to current liabilities during the third quarterpurchase of fiscal 2008. The Company intends to refinanceits manufacturing and distribution facility located in Adelanto, California. As of May 31, 2008, the mortgage on or before maturity.

Put Warrant Liability

In connection with the subordinated loan agreement between the Companybalance is approximately $1.7 million and HillStreet Fund, L.P. (“HillStreet”), entered into on April 5, 2001, the Company issued 325,000 10-year warrants (the “put warrants”) at an exercise price of $3.63 per share. Once the put warrants are put to the Company, the Company is required to pay the holder of the put warrants in cash in accordance with the put warrant agreement. The payment is based on the determination of the Company’s entity value, which is defined in the warrant agreement as the greatest of: (1) the fair market value of the Company established as of a capital transaction or public offering; (2) a formula valueamortized based on a multiple15-year period. The mortgage bears an interest rate of the trailing twelve month EBITDA; or (3) an appraised value as if the Company was sold as a going concern.

On July 23, 2007, the Company received written notice from HillStreetLIBOR (2.83% at May 31, 2008) plus 1.50% and will mature in February 2013. The mortgage loan requires principal payments of the exercise of their right to “put” to the Company the put warrants pursuant to the warrant agreement. On July 31, 2007, the Company and HillStreet agreed upon a cash settlement value of $2.3less than $0.1 million for the put obligation. On August 6, 2007, the Company paid the settlement out of funds available under its existing revolving credit facility.

For accounting purposes, the Company has historically recorded the put warrant liability by calculating the difference between the closing stock price at the end of a reporting period and the exercise price of $3.63 per share multiplied by the 325,000 warrants outstanding. Based on this methodology, a liability of $0.9 million was reported for the put warrants as of the first quarter of fiscal 2007. As a result of the settlement, the Company reported a put warrant expense of $1.4 million in the second quarter of fiscal 2008.month.

NOTE GF – Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees and directors with an exercise price of not less than 85% of the fair market value of the shares at the date of grant. Option term, vesting and exercise periods vary, except that the term of an option may not exceed 10 years. As of the current date, however, no options have been issued at a discount to market price.

The Company also grants stock appreciation rights for a fixed number of shares to various members of management. These rights vest three years after the grant date. The exercise price of the stock appreciation rights is equal to the fair market value of the shares at the date of grant.

Under Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, the Company is required to select a valuation technique or option-pricing model that meets the criteria as stated in the standard, which includes a binomial model and the Black-Scholes model. At present, the Company is continuing to use the Black-Scholes model, which requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options and stock appreciation rights before exercising, the interest rate, the estimated volatility of the Company’s common stock price over the expected term and the number of options and stock appreciation rights that will ultimately not complete their vesting requirements. For fiscal 2007, theThe expected stock price volatility is based on the historical volatility of the Company’s stock. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation. No stock options or stock appreciation rights were issued during the first ninethree months of fiscal 2009 or during fiscal 2008.

The fair value of each option at date of grant was estimated using the Black-Scholes option pricing model with the weighted average assumptions for grants noted in the table below. Expected volatility is based on the historical volatility of the Company’s stock. The expected lives of the options represents the period that the options granted are expected to be outstanding and was calculated based on historical averages. The risk free rate is based on the yield curve of a zero coupon U.S. Treasury bond. The Company does not expect to pay a dividend on common stock.

The following table represents the assumptions used to estimate the fair value of options issued during fiscal 2007 andthe stock appreciation rights outstanding as of November 30, 2007:May 31, 2008:

The fair value was estimated using the Black-Scholes option pricing. Expected volatility is based on the historical volatility of the Company’s stock. The expected lives of the options represents the period that the options granted are expected to be outstanding and was calculated based on historical averages. The risk free rate is based on the yield curve of a zero coupon U.S. Treasury bond. The Company does not expect to pay a dividend on common stock.

In the three and nine months ended November 30, 2007,May 31, 2008, the Company recognized compensation expenseincome of less than $0.1 and $0.3 million respectively, related to stock options issued and stock appreciation rights granted in previous periods. This amount is included in general and administrative expenses.

On August 24, 2007, the Company issued 3,000 shares of restricted stock to its non-employee directors. On November 1, 2007, the Company issued 1,000 shares of restricted stock to one of its employee directors. These shares vest on the one year anniversary of the grant date and the Company will recognize compensation expense related to these shares of less than $0.1 million over the next twelve months.

NOTE HG – Income Taxes

The Company recorded a provision for income taxes in the thirdfirst quarter of fiscal 20082009 of approximately $0.5$0.8 million (39%(38% effective tax rate), inclusive of valuation allowances foron foreign net operating losses of approximately $0.2$0.1 million. This compares with a provision for income tax of $0.2$1.1 million (56% effective tax rate), inclusive of US taxes on foreign deemed dividends of approximately $0.3 million, in the same period in fiscal 2007. For the nine months ended November 30, 2007, the Company recorded a provision for income taxes of $3.1 million (65% effective tax rate), inclusive of revisions to prior years estimated tax provisions and allowances for foreign net operating losses of approximately $0.3 million and $0.5 million, respectively. This compares with a provision for income tax of $0.5 million in the same period in fiscal 2007. In all periods presented, the change in the put warrant liability is non-deductible for tax purposes. After removing the put warrant expense, revisions to prior years estimated tax provisions, tax valuation allowances and the non-taxable accumulated foreign currency translation charge related to the disposition of the assets of Roberts UK, the effective tax rate for the nine months ended November 30, 2007 was 36%.2008. The fiscal 20082009 and 20072008 provisions were based upon the statutory tax rates available in every jurisdiction in which the Company operates.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). On March 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 provides recognition criteria and a related measurement model for tax positions taken by companies. In accordance with FIN 48, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than

not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open.

As a result of the implementation of FIN 48, the Company recognized an increase of approximately $0.4less than $0.1 million in the liability for unrecognized tax benefits associated with uncertain income tax positions which was accounted for as a reduction to the March 1, 2007, balance of retained earnings. During the ninethree months ended November 30, 2007, the Company reduced theMay 31, 2008. The liability for unrecognized tax benefits by less than $0.1was $0.4 million for tax positions taken during that period. The amount of unrecognized tax benefits as of November 30, 2007, was approximately $0.9 million.at May 31, 2008. Any benefit ultimately recognized will reduce the Company’s annual effective tax rate.

Subsequently, in May 2007, the FASB published FASB Staff Position FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1”). FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. As of the Company’s adoption date of FIN 48, its accounting is consistent with the guidance in FSP FIN 48-1.

The Company is subject to income taxes in the USU.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations

within each jurisdiction are subject to interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to USU.S. federal, state and local, or non-USnon-U.S. income tax examinations by tax authorities for the years before 2003.

The Internal Revenue Service commenced an examination ofCompany has concluded its exam with the Company’s US income tax returnU.S. federal taxing authorities for fiscal 2005 that is anticipated to be completed during fiscal 2008. In addition,year 2005. The Company does not expect the Canadian Revenue Agency has commenced an examinationtotal amount of the Company’s Canadian tax returns for 2004 and 2005 that is anticipated to close within twelve months. Based on the outcome of these examinations, the Company may recognize material changes to its unrecognized tax benefit.

benefits to significantly increase or decrease in the next 12 months. The Company classifies interest and penalties related to unrecognized tax benefits in tax expense. The Companyexpense and had approximately $0.1 million of interest and penalties accrued at November 30, 2007.May 31, 2008.

NOTE IH – Earnings Per Share

Basic earnings per share is computed by dividing net income, after deducting preferred stock dividends accumulated during the period, by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income, after deducting preferred stock dividends accumulated during the period, by the weighted average number of shares of common stock and dilutive common stock equivalent shares outstanding. The amount of preferred stock dividends is immaterial in all periods presented. There were less thanapproximately 0.1 million and 0.2 million of common stock equivalent shares excluded from the dilutive earnings per share calculation because they were anti-dilutive in the three months ended May 31, 2008 and nine month periods ended November 30, 2007, respectively. In the corresponding periods presented for fiscal 2007, the amount of antidilutive shares was 0.2 million and 0.8 million, respectively. The following is a reconciliation of the number of shares used in the basic and diluted computation of net income per share (in thousands)

		For the Three Months Ended May 31,
		2008		2007
Weighted average number of common shares outstanding—basic		3,433		3,440
Dilution from stock options and warrants		63		161
Weighted average number of common shares outstanding—diluted		3,496		3,601

NOTE JI – Comprehensive Income

The Company records foreign currency translation adjustments as other comprehensive income. For the three and nine months ended November 30,May 31, 2008 and 2007, comprehensive income (loss) totaled $2.7$1.0 million and $3.4$1.5 million, respectively. This compares with $0.1 million and $(5.5) million for the same periods in fiscal 2007.

Note KJ – Segment Information

In accordance with Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information”, in this report, the Company has determined that it operates in five business segments: Domestic, Canada, Europe, Australia/New Zealand and Other. The Other segment is made up of operations in Latin America and Asia. Management has chosen to organize the operations into geographic segments, with each segment being the responsibility of a segment manager. Each segment markets and sells flooring-related products to the residential, new construction, do-it-yourself and professional remodeling and renovation markets and home centers.

The performance of the business is evaluated at the segment level. We manage cash, debt and income taxes centrally. Accordingly, we evaluate performance of our segments based on operating earnings exclusive of financing activities and income taxes. Segment results were as follows (in thousands):

During the quarter ended May 31, 2008, the Company recorded a net charge of $0.2 million for inventory, accounts receivable and equipment adjustments in the Australia/New Zealand segment. Although this charge related to prior periods, it was recorded in the current period as the Company deemed the charge to be immaterial to those prior periods.

The results from the Canadian operations are included as their own segment according to the provisions of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The reported results do not contain allocations of corporate expenses and sales infrastructure and their product costs are not burdened based on Canada’s level of sales to external customers.

Amounts are attributed to the country of the legal entity that recognized the sale or holds the assets. The intercompany sales are billed at prices established by the Company. The price takes into account the product cost and overhead of the selling location.

NOTE LK – Contingencies

The Company is involved in litigation from time to time in the course of business. Based on information currently available to management, the Company does not believe that the outcome of any of the legal proceedings in which the Company is involved will have a material adverse impact on the Company.

The Company is subject to federal, state and local laws, regulations and ordinances governing activities or operations that may have adverse environmental effects, such as discharges to air and water, handling and disposal practices for solid, special and hazardous

wastes, and imposing liability for the cost of clean up, and for certain damages resulting from sites of past spills, disposal or other releases of hazardous substances (together, “Environmental Laws”). Sanctions which may be imposed for violation of Environmental Laws include the payment or reimbursement of investigative and clean up costs, administrative penalties and, in certain cases, prosecution under environmental criminal statutes. The Company’s manufacturing facilities are subject to environmental regulation by, among other agencies, the Environmental Protection Agency, the Occupational Safety and Health Administration, and various state authorities in the states where such facilities are located. The activities of the Company, including its manufacturing operations at its leased facilities, are subject to the requirements of Environmental Laws. The Company believes that the cost of compliance with Environmental Laws to date has not been material to the Company. Based on information currently available to management, the Company is not aware of any situation requiring remedial action by the Company or which would expose the Company to liability under Environmental Laws which are reasonably expected to have a material adverse effect on the Company as a whole. As the operations of the Company involve the storage, handling, discharge and disposal of substances which are subject to regulation under Environmental Laws, there can be no assurance that the Company will not incur any material liability under Environmental Laws in the future or will not be required to expend funds in order to effect compliance with applicable Environmental Laws.

The Company completed testing at its facility in Bramalea, Ontario, Canada for leakage of hazardous materials and, as a result, in fiscal 1999 the Company prepared a plan to remediate the contamination over a period of years and this plan was subsequently approved by the Canadian Ministry of Environment. The Company recorded a reserve for potential environmental liability on the closing date of the Roberts Consolidated Industries, Inc. acquisition of approximately $0.3 million and this amount was subsequently increased by $0.3 million based on additional information to $0.6 million based on an estimate for the cost of remediation. DuringFrom fiscal 2007, the Company increased the reserve by an additional $0.1 million. Through November 30, 2007,1999 through fiscal 2008, the Company has spent approximately $0.8$0.9 million and anticipates spending less than $0.1 million on ongoing monitoring of wells and other environmental

activity per year for approximately the next three years. The accrued liability at November 30, 2007May 31, 2008 was approximately $0.1 million.

During fiscal 2002, the Company received notice from the United States Environmental Protection Agency (the “EPA”) that an entity identified as Roberts Consolidated Industries, Inc. may be involved in the contamination of landfill sites in Clark County, Ohio and Santa Barbara County, California. In addition, in April 2003 and October 2006, the record owner and a prior owner of certain real property in Vancouver, Washington informed the Company that an entity known as Roberts Consolidated Industry, Inc. owned or operated a facility during which time hazardous substances were disposed of or released at the site, and that, pursuant to Washington

State law, the Company is or may be liable for clean up costs at the site. At this time, the Company is not aware whether these entities are predecessors to any of its affiliates or whether they are unrelated entities.

During fiscal 2005, the Company settled a lawsuit that was filed on December 27, 2002 whereby Roberts Holdings International, Inc. (“Roberts Holding”), an inactive subsidiary of the Company, was named as a third party defendant in a case before the United States District Court for the Western District of Michigan titled Strebor Inc. v. International Paper Co., Case No. 1:02 CV0948. The third party plaintiff alleged that Roberts Holding is a successor to a company known as Roberts Consolidated Industries, Inc. and is required to indemnify previous owners for costs associated with the clean-up of a property in Kalamazoo, Michigan. The Company agreed to pay $50,000$40,000 per year beginning in October 2004 for five consecutive years in settlement of this action.

On October 15, 2007, the court entered an order of dismissal approving the Stipulation of Dismissal Without Prejudice jointly filed by the plaintiff and the Company on October 4, 2007 as to the Company as a Defendant, providing for the voluntary dismissal of plaintiff’s claims against the Company in Greene v. Ashland Chemical, Inc., et al., Case No. 03-CV-231458, Div. 7, which matter was pending in the Circuit Court of Jackson County, Missouri at Kansas City. In this wrongful death matter, the plaintiff alleged that the Company, and Roberts Consolidated Industries, Inc., a wholly owned subsidiary of the Company, along with more than 30 other defendants, manufactured products containing benzene with which the plaintiff came into contact while working between approximately 1954 and 1999, and which allegedly caused his death. This action was originally instituted against the Company on August 11, 2006, when the plaintiff served the Company with a petition for unspecified damages. An answer to the complaint was filed in December 2006 denying the allegations and asserting several defenses.

On December 13, 2007, the court entered an Order and Judgment approving the confidential settlement reached in mediation that occurred on November 16, 2007, in the case of Imogene Calcaterra-Lepique and C.C., by and through her Next Friend, Brenda O’Neal v. Q.E.P. Co., Inc. and Roberts Consolidated Industries, Inc., Home Depot, Inc., General Electric Co., and Rheem Mfg. Co., Case No. 4:06-CV-1050 CAS, which matter was pending in the US District Court for the Eastern Distinct of Missouri. The Company’s insurers funded the Company’s settlement payment in its entirety. In this wrongful death case, originally instituted against the Company on July 12, 2006, plaintiffs alleged that the decedent suffered burns, allegedly causing his death, when installing carpet using Roberts 4000 carpet adhesive, a product manufactured by Roberts Consolidated Industries, Inc., a wholly owned subsidiary of the Company. Plaintiffs alleged that fumes from the Roberts 4000 caused the fire that injured the decedent. The plaintiff originally sought $20,000,000 in damages.

On October 29, 2007, Roberts Consolidated Industries, Inc. and Roberts Holding International, Inc., wholly owned subsidiaries of the Company, received a notice of claim for indemnity from International Paper Corporation, one of many defendants named in a Verified Complaint in the lawsuit captioned John Rosebery et al v. 3M Marine, et al., Index No. 21464/07, pending in the New York Supreme Court, County of Suffolk. The plaintiff alleges that he contracted leukemia as a result of exposure to benzene in various products allegedly manufactured and distributed by several defendants, including International Paper Corporation or its predecessors. Although Roberts Consolidated Industries, Inc. and Roberts Holding International, Inc. are not named as defendants in the action, International Paper Corporation has stated in the demand for indemnity that “the products identified by Mr. Rosebery appear to be products which, as of December 31, 1975, were products of Roberts.” The Company has responded on behalf of its subsidiaries to International Paper’s demand by requesting that International Paper provide additional documentation and information regarding the contentions. Insufficient information exists at this time for the Company to opine on the merits, if any, of the claim for indemnity or the underlying claims.

NOTE ML – Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting StandardsSFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting

principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair valueFor financial assets and liabilities, this statement is the relevant measurement attribute. Accordingly, SFAS No. 157effective for fiscal periods beginning after November 15, 2007 and does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (the Company’s fiscal year endingIn February 28, 2009). The Company is currently evaluating2008, the impact, if any, that the adoption of SFAS No. 157 will have on the Company’s operating income or net earnings.

In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, “Effective DateNo. 157-2 was issued which delayed the effective date of FASB Statement No. 157” that would permit a one-year deferral in applying the measurement provisions of SFAS 157 to non-financialfiscal years ending after November 15, 2008 for nonfinancial assets and non-financial liabilities, (non-financial items)except for items that are not recognized or disclosed at fair value in an entity’sthe financial statements on a recurring basis (at least annually). Therefore, ifThe adoption of SFAS No. 157 did not have a material effect on the changeconsolidated financial statements. We are currently evaluating the impact of adopting the provisions of FSP 157-2.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”. This proposed FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of an intangible asset under FASB Statement No. 142, “Goodwill and Other Intangibles” (FAS 142). The FSP aims to improve the consistency between the useful life of an intangible asset as determined under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, “Business Combinations”, and other applicable accounting literature. As a non-financial item is not requiredresult of this FSP, entities generally will be able to align the assumptions used for valuing an intangible asset with those used to determine its useful life. This FSP will be recognized or disclosed in theeffective for financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred untilissued for fiscal years beginning after NovemberDecember 15, 2008 (the Company’s fiscal year ending February 28, 2010) and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact,effect, if any, that the adoption of FSP 157-b will have on the Company’s operating income or net earnings.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value, and requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first fiscal quarter of 2008 although earlier adoption is permitted. The Company expects that SFAS No. 159 will not have an impactthis statement on its consolidated financial statements.

In JuneDecember 2007, the Emerging Issues Task Force (EITF) reachedFASB issued FAS No. 141(R) “Business Combinations”, which applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (the Company’s fiscal year ending February 28, 2010). This statement retains the fundamental requirements in FAS 141 that the acquisition method be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141(R) broadens the scope of FAS 141 by requiring application of the purchase method of accounting to transactions in which one entity establishes control over another entity without necessarily transferring consideration, even if the acquirer has not acquired 100% of its target. Among other changes, FAS 141(R) applies the concept of fair value and “more likely than not” criteria to accounting for contingent consideration, and preacquisition contingencies. As a consensus on Issueresult of implementing the new standard, since transaction costs would not be an element of fair value of the target, they will not be considered part of the fair value of the acquirer’s interest and will be expensed as incurred. This pronouncement may impact the Company in the event that acquisitions are done in the future.

In December 2007, the FASB also issued FAS No. 06-11,160, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared inNoncontrolling Interests”, which is effective for fiscal years beginning on or after December 15, 2007.2008 (the Company’s fiscal year ending February 28, 2010). This statement clarifies the classification of noncontolling interests in the consolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and the holders of non-controlling interests. The Company expectsdoes not expect that EITF 06-11the adoption of this standard will not have ana significant impact on its consolidated financial statements.

NOTE NM – Subsequent Event

Payable to banks under revolving creditmortgage facilities

On JanuaryJune 10, 2008, the Company’s United Kingdom subsidiary’s existing financing arrangements were refinanced incompany amended its entirety with an asset based revolving creditloan facility with atwo domestic financial institution. The UK revolving credit facility allows the Company’s United Kingdom subsidiarylenders to borrow up to the British Pounds equivalent of $3,500,000 based on the advancement of up to 85% of the book value of eligible accounts receivable plus the lesser of 65% of the book value of eligible inventory or 85% of the liquidation value of eligible inventory. The facility has the same maturity date as the Company’s US loan agreement, hasdraw down an interest rate equal to LIBOR or the financial institution’s UK reference rate plus a margin equal to 1.50% to 2.25% as determinedadditional CAD 0.5 million (US$ 0.5 million) under the Company’s US revolving credit facility (provided that, through July 9, 2008, the margin shall notexisting Canadian mortgage. The payments continue to be less than 2.00%), and is collateralized by substantially all of the assets of the subsidiary as well as a guaranty by the parent Company. At January 10, 2008, the interest rate was the reference rate (5.60%) plus 2.00%, the subsidiary had borrowed approximately $2.2$0.1 million and the subsidiary had approximately $0.4 million available for future borrowings.

Executive Overview

The Company is a worldwide leader in the manufacturing, marketing and distribution of a broad line of specialty tools and flooring related products, marketing over 3,000 specialty tools and related products used primarily for surface preparation and installation of ceramic tile, carpet, vinyl and wood flooring. The Company’s products are sold to home improvement retailers, specialty distributors to the hardware, construction, flooring and home improvement trades, chain or independent hardware, tile and carpet retailers for use by the do-it-yourself consumer as well as the construction or remodeling professional, and original equipment manufacturers. The Company has executed a growth strategy intended to improve overall performance and profitability of operations that includes acquisitions, dispositionsexpanding product offerings and consolidations,increasing penetration with its largest customers, expanding market share by obtaining new customers, introducing new and innovative products and enhancing the reduction of risk associated with certain large customer concentrations and the enhancement of cross selling of productproducts among ourits channels of distribution.

The Company operates in five business segments: Domestic, Canada, Europe, Australia/New Zealand and Other. Management has chosen to organize the segments into geographic areas, with each segment being the responsibility of a segment manager. Each segment markets and sells flooring-related products to the residential, new construction, do-it-yourself and professional remodeling and renovation markets and home centers. The European segment is made up of the Company’s operations in the UK and France. The Other segment is made up of operations in Latin America and Asia.

In the thirdfirst quarter of fiscal 2008,2009, the Company experienced an increasea decrease in sales of approximately $0.2$4.1 million or less than 1% over7% compared to the same period in the previous fiscal year. Sales decreased 3%The sales decrease was primarily in the combined DomesticCompany’s North America operations and Canadian segments, resulting primarilyresulted from a significant decline in sales to the Company’s second largest home center customer and from the reduction in sales associated with the sale of the Company’s O’Tool and Stone Mountain operations in the first and second quarter of fiscal 2008, respectively. Sales decreased 4% in the Europe segment, due primarily to the slight downturn in sales in the Company’s U.K. and France operations. Sales increased in the Company’s Australia/New Zealand segment by 26%, primarily due to the foreign currency translation effect of the appreciated Australian Dollar compared to the US Dollar. Sales increased in the Other segment by 7% due to improving sales performance in the Company’s Chile, Argentina and Mexico operations.

For the nine months ended November 30, 2007, sales increased by $6.0 million or 4% compared to the same period in the previous year. Sales increased in the combined Domestic and Canada segments by 2% and contributed $3.1 million to the overall sales increase. Sales at the Company’s subsidiaries outside of North America were positively affected by changes in currency translation rates that increased sales by $3.6 million for the first nine months of fiscal 2008 compared to the same period in the previous year.

Gross profit increaseddecreased in the three and nine months ended November 30, 2007May 31, 2008 by $0.5 million or 3% compared to the same periods in the previous fiscal yearyear. However, gross profit as a percentage of sales, increased to 30.3% in the first quarter of fiscal 2009 from 29.1% in the first quarter of fiscal 2008 due to favorable changes in customer and product mix resulting from the increased sales of higher margin underlayment and wet saws,products.

In the introductionfirst quarter of higher margin adhesives and other price increases that were passed onfiscal 2009, total operating expenses decreased by $0.3 million or 2% compared to the Company’s customers. Infirst quarter of fiscal 2008. As a percentage of net sales, operating expenses were 26% in the thirdfirst quarter of fiscal 2009 compared to 24% in the corresponding period in fiscal 2008. This increase is due to fixed cost being spread across lower sales in the fiscal 2009 period compared to the fiscal 2008 period.

Net income for the first quarter of fiscal 2009 was $1.2 million or $0.35 per diluted share compared with net income of $0.9 million or $0.23 per diluted share in the first quarter of fiscal 2008, compared to the third quarter of fiscal 2007, gross profit as a percent of sales increased to 28.8% from 26.8%. In the nine months ended November 30, 2007 compared to the nine months ended November 30, 2006, gross profit as a percentage of sales increased to 28.7% from 27.3%.

Recent Developments

Sale of Business

In fiscal 2007, the Company entered into a license and royalty agreement with Estillon B.V., a European supplier of carpet specialty tools, granting Estillon the rights to manufacture, market and distribute products using the Company’s Roberts^® and Smoothedge^® brand names to customers, other than mass merchants, within certain continental European countries. On October 24, 2007, the Company expanded its license and royalty agreement with Estillon B.V to include Great Britain and Ireland. At the same time, additional agreements were executed with Estillon whereby Estillon purchased inventory and accounts receivable from the Company

in exchange for cash. The Company recorded a chargean increase of $0.3 million for the write-off of Roberts UK ‘s accumulated foreign currency translation adjustment during the third quarter of fiscal 2008, which is recorded in general and administrative expenses. This transaction did not qualify for treatment as a discontinued operation due to the Company’s continued involvement in the market through the license and royalty agreement. For the nine months ended November 30, 2007, the Company recorded royalty income of $0.1 million related to the arrangement with Estillion in continental Europe.or $0.12 per diluted share.

Purchase of Property, Plant and Equipment

On September 28, 2007, the Company purchased a manufacturing and distribution facility situated on 5.8 acres of land in the City of Adelanto, San Bernardino County, California. The Company paid approximately $2.0 million for the facility utilizing funds available to the Company under its existing revolving credit facility. The purchase price and other related costs, which totaled $0.1 million, were allocated to land, building and machinery in the amounts of $0.4 million, $1.3 million and $0.4 million, respectively. In the fourth quarter of fiscal 2008, the Company intends to refinance a portion of the purchase price of this property through a mortgage facility.

The Adelanto facility will be used to improve distribution service to the Company’s West Coast customers and to expand the Company’s manufacturing capacity for adhesives and dry set powders. During the fourth quarter of fiscal 2008, the Company intends to relocate the current distribution activities at its Henderson, Nevada facility to the Adelanto facility. The Company will not renew the lease at the Henderson facility when it expires in January 2008.

Critical Accounting Policies and Estimates

Revenue Recognition

The Company recognizes revenueSales are recognized when products aremerchandise is shipped and title has passed to the customer, the selling price is fixed and determinable and collectibility of the sales price is reasonably assured. Such revenue is recorded net of estimated sales returns, discounts and allowances. The Company providesestablishes reserves for estimated costs of future anticipated product returns and allowances based on current and historical experience, when the related revenues are recognized. The Company records estimated reductions to revenue for customer programs including volume-based incentives. Guaranteed discounts to our home center customers are recorded as a reduction in revenue.information and trends. Sales and accounts receivable have been reduced by such amounts. The Company adopted Emerging Issues Task Force (EITF) Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF Issue 06-3 became effective for the Company on March 1, 2007. This adoption has not had an impact on the Company’s financial statements as the Company has not changed its existing accounting policy which is to present taxes within the scope of EITF Issue 06-3 on a net basis.

The Company accounts for upfront consideration given to customers in accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). This incentive is recorded as a reduction to revenue at the earlier of the Company making payment or incurring an obligation to the customer, unless the Company has an agreement with the vendor in which the Company can control the benefit, in such case, the incentive is recorded as a deferred cost asset and is expensed as a reduction to revenue over the term of the agreement. The Company evaluates the impairment of deferred cost assets on a quarterly basis.

Inventories

The Company records inventory at the lower of standard cost, which approximates actual cost, or market. The Company maintains reserves for excess and obsolete inventory based on market conditions and expected future demand. If actual market conditions were to be less favorable than those projected by management, additional inventory reserves could be required.

Accounts Receivable

The Company’s accounts receivable are principally due from home centers or flooring accessory distributors. Credit is extended based on an evaluation of a customer’s financial condition, and collateral is not required. Accounts receivable are due at various times based on each customer’s credit worthiness and selling arrangement. The outstanding balances are stated net of an allowance for doubtful accounts. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the customer’s previous loss history, the customer’s ability to pay its obligations and the condition of the general economy and the industry as a whole.

Impairment Evaluations

The Company evaluates the recoverability of long-lived assets, including property, plant and equipment, and identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs indefinite-lived impairment tests on at least an annual basis and more frequently in certain circumstances. When the Company determines that the carrying amount of long-lived assets may not be recoverable based upon the existence of certain indicators, the assets are assessed for impairment based on the future undiscounted cash flows expected to result from the use of the asset. For goodwill and other indefinite-lived intangibles, impairment assessments are generally determined using the estimated future discounted cash flows of the asset’s reporting unit using a discount rate determined by management to be commensurate with the risk inherent in the current business model. In both instances, if the carrying amount of the asset being tested exceeds its fair value, an impairment of the value has occurred and the asset may be written down. The Company’s annual impairment assessment date is August 31^st.

Income Taxes

The Company is required to estimate income tax in each jurisdiction in which it operates. This process involves estimating actual current tax exposure and deferred income taxes to reflect the tax consequences on future years of differences between the tax basis of

assets and liabilities and their financial reporting amounts each year-end. The Company must then consider the likelihood that any deferred tax assets will be recoverable from future taxable income and to the extent that it believes that recoverability is not likely, the Company establishes a valuation allowance.

In June 2006,For the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretationfirst quarter of FASB Statement No. 109” (“FIN 48”). On March 1, 2007, the Company adopted the provisions of FIN No. 48.

As a result of the implementation of FIN 48,fiscal 2009, the Company recognized an increase of approximately $0.4less than $0.1 million in the liability for unrecognized tax benefits associated with uncertain income tax positions, which was accounted for as a reduction to the March 1, 2007, balance of retained earnings. The amount of unrecognized tax benefits as of November 30, 2007, was approximately $0.9 million.positions. Any benefit ultimately recognized will reduce the Company’s annual effective tax rate (see Note H of the Company’s Notes to Consolidated Financial Statements for further discussion).rate.

Results of Operations

Sales

Net sales by segment for the three and nine months ended November 30,May 31, 2008 (the first quarter of fiscal 2009) were $52.9 million compared to $57.0 million for the three months ended May 31, 2007 (the thirdfirst quarter and first nine months of fiscal 2008, respectively)2008), a decrease of $4.1 million or 7%.

Net sales at the Company’s North American operations decreased by $4.2 million in the first quarter of fiscal 2009 compared to the three and nine months ended November 30, 2006 (the third quarter and first nine months of fiscal 2007, respectively) is as follows (in thousands except percentages):

Domestic and Canada

The decrease in sales in the Company’s Domestic segment in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007, was due to the reduction in sales associated with the2008. The sale of the Company’s O’Tool and Stone Mountain operations in fiscal 2008 contributed $1.6 million to the sales decline in fiscal 2009. The remaining decline was due to lower sales to the Company’s second largest home center customer. Currency translation gains contributed $0.7 million in additional sales to the Company’s North American operations due to changes in the Canadian Dollar compared to the U.S. Dollar.

Sales at the Company’s foreign operations increased by $0.1 million in the first and second quarter of fiscal 2008, respectively. In2009 compared to the thirdfirst quarter of fiscal 2007, these operations contributed $2.3 million2008. This increase was due to the Domestic sales. The increase in sales in the Canadian segment in the third quarter of fiscal 2008 compared with the third quarter of fiscal 2007, was primarily the result of currency translation gains of $0.8$1.1 million generated primarily by changes in the weakening USAustralian Dollar and Euro compared to the CanadianU.S. Dollar. Excluding the effect ofThe currency translation sales in the Canadian segment increased for the third quarter of fiscal 2008 by 4.7% compared to the same period in the previous year.

Sales of wet saw products in the Domestic segment to one of the Company’s home center customers increased by $1.2 million due primarily to the expansion of the direct ship program (direct from the Company’s suppliers to the customer with delivery being taken at the suppliers’ dock). These increasesgains were partially offset by the contraction ofdeclining sales volume in the Company’s distribution customer base as retailAustralian and European operations.

Sales from the Company’s non-North American subsidiaries were 23% and 21% of total sales move from smaller specialty distributors to larger mass merchandisers. Additionally, sales decreased on certain adhesive, tack strip and carpet tool products as compared with the same period in the previous year.first quarter of fiscal 2009 and 2008, respectively.

Gross Profit

Gross profit for the three months ended May 31, 2008 was $16.0 million compared to $16.6 million for the three months ended May 31, 2007, a decrease of $0.5 million or 3%. As a percentage of net sales, gross profit increased to 30.23% in the first quarter of fiscal 2009 from 29.1% in the first quarter of fiscal 2008.

The decrease in gross profit was primarily attributable to the lower sales volume in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Additionally, the Company’s Australian operation was adversely affected by a $0.2 million adjustment for the valuation of inventory. The increase in gross profit as a percentage of sales was primarily due to favorable changes in customer and product mix at the Company’s Domestic and Canadian segments forNorth American operations through the nine months ended November 30, 2007, compared to the same periodsales growth of higher margin products, primarily underlayment. Foreign currency exchange rate changes contributed $0.7 million in the previous year was the result of increased sales of underlayment products of $3.7 million, wet saw products of $3.3 million and adhesives products of $1.5 million. Once again, these sales increases were primarily to home center customers and were offset by declining sales to distributor customers. This increase was partially offset by a decrease in sales in the Company’s Domestic segment of $5.6 million associated with theadditional gross profit. The sale of the Company’s O’Tool and Stone Mountain operations during thein fiscal 2008 period.

Overall sales to our home center customers increased approximately 6% and 11% in the three and nine months ended November 30, 2007, compared to the same periods in the previous fiscal year. Increases in product sales in the fiscal 2008 periods compared to the fiscal 2007 periods were somewhat offset by higher sales rebates rates due to the additional sales volume projectedaccounts for the fiscal 2008 period.

The Company expects to see increases in its sales volume in its Domestic and Canadian segments in the fourth quarter of fiscal 2008 and the beginning of fiscal 2009 as a result of one$0.4 million of the Company’s major customers awarding the Company a substantial amount of new business on some of its higher margined products.

Other Segments

Sales in the Company’s international subsidiaries were positively impacted in the three and nine months ended November 30, 2007, compared to the three and nine months ended November 30, 2006, by the change in currency translation rates between the periods. Sales increased $1.4 million in the third quarter of fiscal 2008 and $3.6 million in the first nine months of fiscal 2008 due to the effect of changes in currency translation rates, primarily generated by changes in the Australian Dollar, British Pound and Euro compared with the US Dollar.

Sales decreased in the Company’s European segment in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007 due to slightly lower sales in the Company’s UK and France operations. For the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007, the sales decline in the European segment was primarily due to lost sales due to the disposition of the Holland operation of $1.1 million that was partially offset by currency translation gains on sales in the UK and France.

Sales increased in the Australia/New Zealand segment in the three and nine months ended November 30, 2007, compared to the same period in the previous year primarily due to currency translation gains of $1.0 million and $2.3 million, respectively. Excluding the effect of currency translation, sales in this segment increased for the third quarter and first nine months of fiscal 2008 by 8.8% and

6.3% compared to the same periods in the previous year. This increase reflects the continued steady growth in the region of both home center and distribution sales. The increase in sales in the Other segment for the third quarter and first nine months of fiscal 2008 compared to the comparable periods in fiscal 2007 is due to a slight upturn in sales activity from the Company’s Chile, Argentina and Mexico operations during the periods.

Sales from the Company’s non-North American subsidiaries were 24% and 22% of total sales in the third quarter of fiscal 2008 and 2007, respectively. For the nine months ended November 30, 2007 and 2006, sales from the Company’s non-North American subsidiaries were 23% and 22% of total sales, respectively.

Gross Profit

Gross profit by segment for the three and nine months ended November 30, 2007, compared to the three and nine months ended November 30, 2006, is as follows (in thousands, except percentages):

Domestic and Canada

The increase in gross profit in the Domestic and Canadian segments in the third quarter of fiscal 2008 compared to the same period in fiscal 2007 was primarily the result of improved product sales mix resulting from sales increases in higher margin underlayment and wet saw products, and sales decreases in lower margin adhesive products. In the third quarter of fiscal 2008, the underlayment sales and the direct ship program increased gross profit by $0.4 million and $0.1 million, respectively. These increases were partially offset by lower gross profit on certain carpet tools and tack strip products.

The increase in gross profit in the Domestic and Canadian segments for the nine months ended November 30, 2007, compared to the same period in the previous year was due to increased sales volume of higher margin products. This resulted from the increase in underlayment and wet saw products sales that increased gross profit by $2.2 million and $1.0 million, respectively. Higher volume, price increases and the introduction of higher margin adhesive products during the nine months ended November 30, 2007 increased gross profit by $1.7 million. The increases were offset by $1.9 million of lower gross profit related to the sale of the O’Tool and Stone Mountain businesses in fiscal 2008.

Gross margin was also positively affected in the three and nine months ended November 30, 2007, compared to the three and nine months ended November 30, 2006, by a change in currency translation rates between the periods. Gross margin increased $0.3 million and $0.4 million in the three and nine months ended November 30, 2007, respectively, compared to the same periods in fiscal 2007 due to the effect of changes in translation rates, primarily generated by changes in the Canadian Dollar compared with the US Dollar. Consequently, the positive impact on gross margin was primarily recorded in the Canada segment.

Gross profit as a percentage of sales in the Domestic segment increased to 28% in the third quarter of fiscal 2008 from 25% in the comparable period of fiscal 2007. For the nine months ended November 30, 2007, gross profit as a percentage of sales in the Domestic segment was 27% compared to 26% in the same period in the previous year. This improvement is due to a favorable change in the Company’s sales mix through the sales growth of higher margin products, including the underlayment and recently introduced adhesive products. Also, the Company has continued to make improvements in its manufacturing processes and has had some success increasing selling prices on certain products to customers in response to increases in raw material and other product costs.

Gross profit as a percentage of sales in the Canadian segment increased to 36% in the third quarter of fiscal 2008 from 31% in the comparable period of fiscal 2007. For the nine months ended November 30, 2007, gross profit as a percentage of sales in the Canadian segment was 37% compared to 32% in the same period in the previous year. This improvement is entirely due to the increased sales volume of the high margin underlayment and adhesive products previously discussed.

Other Segments

Gross margin of the segments outside of North America was positively impacted in the three and nine months ended November 30, 2007, compared to the three and nine months ended November 30, 2006, by the change in currency translation rates between the periods. Gross margin increased $0.4 million in the third quarter of fiscal 2008 compared to the same period in fiscal 2007 and by $1.1 million in the nine months ended November 30, 2007, compared to the same period in the previous year due to the effect of changes in currency translation rates, primarily generated by changes in the Australian Dollar, British Pound and Euro compared with the US Dollar.

As previously discussed, lower sales volume at the Company’s UK and France operation was the reason for the decrease in gross profit in the Europe segment in the third quarter of fiscal 2008 compared with the same period in the previous fiscal year. For the nine months ended November 30, 2007 compared to the nine months ended November 30, 2006, lower sales volume associated with the disposition of the Company’s Holland operation in the second quarter of fiscal 2007 was the main reason for the decrease in gross profit in the Europe segment. Gross profit as a percentage of sales in the Europe segment increased to 24% in the third quarter of fiscal 2008 from 23% in the third quarter of fiscal 2007. However, for the nine months ended November 30, 2007, gross profit as a percentage of sales in the Europe segment decreased to 24% compared to 27% in the same period in the previous year. This decrease was due to cost increases in the UK operation that have not been passed on to customers through higher prices and the implementation of additional vendor rebate incentives as the operation attempts to remain competitive in its market.

The increase in gross profit in the Australia/New Zealand segment for the three and nine months ended November 30, 2007, compared to the same periods in the previous year was primarily due to currency translation gains of $0.3 million and $0.8 million, respectively. Gross profit as a percentage of sales decreased to 33% in both the three and nine months ended November 30, 2007, from 34% in both the three and nine months ended November 30, 2006. This reduction is primarily due to product cost increases that have not been passed on to customers through higher selling prices.

Lower profit margin reported in the Company’s Mexican operation caused the reduction in gross profit and gross profit as a percentage of sales for the Other segment in both the three and nine months ended November 30, 2007, compared to the same periods in the previous year.profit.

Operating Expenses

Operating expenses excluding impairment charges and other income and expenses, by segment for the three and nine months ended November 30, 2007,May 31, 2008 were $13.7 million compared to $13.9 million for the three and nine months ended November 30, 2006, are as follows (in thousands except percentages):May 31, 2007, a decrease of $0.2 million or 1%.

Shipping expenses for the three and nine months ended November 30, 2007,first quarter of fiscal 2009 were approximately $5.5$5.6 million and $17.3 million, respectively compared to approximately $5.9 million and $17.7$6.1 million for the same periods in fiscal 2007. The reduction in shipping

expenses in the thirdfirst quarter of fiscal 2008, compared to the third quartera decrease of fiscal 2007$0.5 million or 8%. The reduction in shipping cost was primarily due to the sale of the O’Tool and Stone Holding operations that eliminated $0.3 million of shipping expenses. In addition, shipping expenses decreased in the Domestic and Canadian segments due to home center customerlower sales which have lower freight cost, replacing distributor customer sales, which typically have higher freight cost. These reductions were offset by higher freight charges from common carriers arising from increased fuel costs.volume. For the threefirst quarter of fiscal 2009 and nine months ended November 30, 2007,2008, shipping expenses remained consistent as a percent of net sales at approximately 10%, compared to 11% for both the comparable periods in fiscal 2007. The reduction of shipping expenses as a percentage of sales is primarily due to the expansion of the Company’s direct shipment program that does not incur any freight-out costs..

General and administrative expenses for the three months ended November 30, 2007,first quarter of fiscal 2009 were $5.0$4.5 million compared to $4.4$4.7 million in the same period in the previous year, an increasefirst quarter of 13%fiscal 2008, a decrease of $0.2 million or 5%. The increasedecrease was primarily due to costsreductions in consulting and legal fees that were incurred in the Europe segment due to $0.2 millionfirst quarter of severance expensesfiscal 2008 related to the eliminationCompany’s Sarbanes Oxley 404 compliance project and an IRS Audit of manufacturing and other personnel at the Company’s UK operation. In addition, under the provisions2005 tax return, respectively. As a percentage of Statement of Accounting Standards No. 52, “Foreign Currency Translation”, the Company realized a translation loss relating to the disposition of the assets of Roberts UK. The realization resulted in the reclassification of $0.3 million from comprehensive income to operating expenses. This amount was recorded in General and Administrative Expenses in the Europe segment. For the nine months ended November 30, 2007,net sales, general and administrative expenses were $13.8 million compared to $14.6 millionremained consistent at 8% in the same period in the previous year, a reductionfirst quarter of 5%. The reduction is primarily due to the disposition of the Company’s Holland subsidiary that eliminated $1.0 million of generalfiscal 2009 and administrative expenses that were included in the nine months ended November 30, 2006, which was partially offset by the Europe segment restructuring expenses and realized translation loss that were recorded in nine months ended November 30, 2007. This reduction in general and administrative expenses was greater than it typically would be due to the impact of the Holland expenses and realized translation losses, and otherwise general and administrative expenses for the nine months ended November 30, 2007 would have been consistent with November 30, 2006 at 8% of sales.2008.

Selling and marketing expenses infor the three months ended November 30, 2007,first quarter of fiscal 2009 were $3.4$3.6 million compared to $3.1 million in the same period in the previous year,first quarter of fiscal 2008, an increase of 11%$0.5 million or 17%. ForIncreased expenses for trade shows and other product promotion activities at the nine months ended November 30, 2007,Company’s North American operations resulted in $0.2 million in additional marketing expenses. Additionally, the Company’s Australian operation reorganized its sales operation resulting in an additional $0.2 million in selling expenses. Changes in foreign currency exchange rate changes contributed $0.2 million in additional selling and marketing expenses were $10.0 million compared to $9.5 million in the same period in the previous year, an increase of 5%.expenses. As a percent of sales, selling and marketing expenses were 6%7% in all periods presented.the first quarter of fiscal 2009 compared to 5% in the first quarter of fiscal 2008.

Other Income / Expense

In the third quarter of fiscal 2008, the Company’s UK operation completed the closure of its manufacturing operation and will be sourcing all of its products from the Company’s Asian and other worldwide suppliers. In connection with this product sourcing initiative the Company’s UK operation sold certain of its manufacturing equipment to one of its overseas suppliers. In connection with this sale the Company recorded a gain of $0.2 million as other income.

On July 18, 2007, the Company entered into an asset purchase agreement with ParexLahabra, a manufacturer of premixed mortars for the construction industry, for the sales of the business, accounts receivable, inventory and certain intangible assets of the Company’s Stone Holdings operation. The sale proceeds were approximately $2.4 million. During the second quarter of fiscal 2008, the Company recorded a gain on the sale of the Stone Holdings operation of approximately $0.6 million as other income.

On May 4, 2007, the Company entered into agreements with Bon Tool Co., a US supplier of construction tools, equipment and decorative concrete products, for the sale of the business, inventory and certain intangible assets of the Company’s O’Tool operation, and the sublease of the warehouse space previously occupied by the O’Tool operation. The assets sold consist mainly of inventory with a cost of approximately $1.1 million at May 30, 2007. During the first quarter of fiscal 2008, the Company recorded a loss on the sale of the O’Tool business of less than $0.1 million as other expense.

In connection with the disposition of certain of the Company’s Holland operationEuropean operations in fiscal 2007 and 2008, the Company receives royalty income in connection with the associated license and royalty agreement entered into with Estillon B.V. During the three and nine months ended November 30, 2007,first quarter of fiscal 2009, the Company recorded royalty income of less thanapproximately $0.1 million and $0.1 million, respectively.

Impairment Loss on Goodwill and Other Intangibles

The Company performs an impairment test on goodwill during the second quarter of each fiscal year. The Company performed an impairment test during the second quarter of fiscal 2008 and determined that there was no impairment to goodwill as of August 31, 2007. The impairment test in the previous fiscal year led to the determination that the carrying amount of goodwill exceeded its fair value in the Company’s Mexico, UK and US reporting units. This resulted in an impairment charge of $7.6 million being recorded in the second quarter of fiscal 2007, which was subsequently adjusted to $7.5 million in the third quarter of fiscal 2007 by recording a favorable adjustment of $0.1 million in the third quarter of fiscal 2007.million.

Changes in the Put Warrant Liability

On July 23, 2007,In the second quarter of fiscal 2008, the Company received written notice from HillStreet of the exercise of their right to “put” to the Company the put warrants in the Company pursuant to the Warrant Agreement. On July 31, 2007, the Company and HillStreet agreed uponpaid a cash settlement value of $2.3 million forits liability under the put obligation. The Company paid the settlement out of funds available under its existing revolving credit facility.

For accounting purposes, the Company has historically recorded the put warrant liability by calculating the difference between the closing stock price at the end of a reporting period and the exercise price of $3.63 per share multiplied by the 325,000 warrants outstanding. Based on this methodology, a liability of $0.9 million was reported for the put warrants as ofthen outstanding Warrant Agreement. In the first quarter of fiscal 2007. As a result2008, the company recorded an expense of less than $0.1 million related to the change in the fair value of the settlement, the Company reported a put warrant expense of $1.4 million in the second quarter of fiscal 2008. No further income or expense will be recorded related to this Warrant Agreement. For a more detailed discussion regarding the put warrants, see “Liquidity and Capital Resources”.liability.

Interest Expense

Interest expense for the three and nine months ended November 30, 2007,first quarter of fiscal 2009 was approximately $0.7$0.5 million and $2.0 million, respectively. These amounts comparecompared to $0.7 million and $2.2 million infor the same periods in the previousfirst quarter of fiscal year.2008. Interest expense has declined in the comparable periods due to lower borrowings and interest rates in the current period.

Income Taxes

The Company recorded a provision for income taxes in the three and nine months ended November 30, 2007, of approximately $0.5 million and $3.1 million, respectively. This compares with a provision of $0.2 million and $0.5 million in the same periods in fiscal 2007. The provision for income taxes in the thirdfirst quarter of fiscal 2008 include a valuation allowance2009 of $0.2approximately $0.8 million on foreign net operating losses, which the Company determined is unlikely to provide any future benefit. The provision for income taxes for the nine months ended November 30, 2007, includes $0.3 million of revisions to prior years estimated(38% effective tax provisions and $0.5 millionrate), inclusive of valuation allowances on foreign net operating losses. In all periods presented, the changelosses of approximately $0.1 million. This compares with a provision for income tax of $1.1 million in the put warrant liability is non-deductible for tax purposes. After removing the put warrant expense, revisions to prior years estimated tax provisions, tax valuation allowances and accumulated foreign currency translation charge, the effective tax ratesame period in the nine months ended November 30, 2007, was 36%.fiscal 2008. The fiscal 20082009 and 20072008 provisions were based upon the statutory tax rates available in every jurisdiction in which we operate as adjusted for tax contingencies.the Company operates.

Net Income

NetAs a result of the above and specifically controlling operating expenses, incurring less interest costs and returning to a more normalized effective tax rate, net income for the thirdfirst quarter of fiscal 20082009 was $0.8$1.2 million or $0.22$0.35 per diluted share compared with a net income of $0.4$0.9 million or $0.10$0.23 per diluted share in the thirdfirst quarter of fiscal 2007. For the nine months ended November 30, 2007, net income was $1.7 million or $0.47 per diluted share compared to a net loss2008, an increase of $6.0 million or $1.78 per diluted share in the same period in fiscal 2007. Net income adjusted for the change in the put warrant liability and other non-recurring items was $1.1 million or $0.31 per diluted share for the third quarter of fiscal 2007 compared with $0.3 million or $0.08$0.12 per diluted share for the third quarter of fiscal 2007. Net income adjusted in the same manner for the nine months ended November 30, 2007 was $3.1 million or $0.85 per diluted share compared to $1.0 million or $0.21 per diluted share for the nine months ended November 30, 2006.share.

Non-GAAP Financial Measures—Reconciliation of Net Income to Net Income Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items and Earnings Per Share Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items

Net Income Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items and Earnings Per Share Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items are Non-GAAP financial measures. The Company has included these Non-GAAP financial measures because it believes that the measures provide an indicator of profitability and performance of the Company’s operations and provide a meaningful comparison of its current operating performance with its historical results. The Company uses Net Income Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items and Earnings Per Share Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items as internal measures of its business. Net Income Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items and Earnings Per Share Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items are not meant to be considered a substitute or replacement for Net Income and Earnings Per Share as prepared in accordance with generally accepted accounting principles.

The reconciliation of Net Income to Net Income Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items and Earnings Per Share to Earnings Per Share Adjusted for the Change in the Put Warrant Liability and Other Non-Recurring Items is as follows (in thousands except for per share data):

Liquidity and Capital Resources

Working capital was approximately $6.6$7.2 million as of November 30, 2007, asMay 31, 2008, compared to approximately $5.1$9.1 million at February 28,May 31, 2007, an increasea decrease of approximately $1.5$1.9 million.

Net cash used in operating activities during the first three months of fiscal 2009 was approximately $1.8 million compared to net cash provided by operating activities during the first nine months of fiscal 2008 was approximately $3.1 million compared to $2.5$4.8 million for the comparable fiscal 20072008 period. During the first ninethree months of fiscal 2008,2009, the Company used cash of $2.5approximately $3.0 million to increase deferred cost assets relating to upfront consideration given to the Company’s largest home center customer in exchange for a national contract to supply specialty tools. During the same period, the Company used cash of $2.0 million to increase inventory and reductionas part of the initial rollout of this national contract. This was partially offset by the decrease in accounts receivable provided cash of $0.9 million.$3.1 million, primarily from the same home center customer. For the same period in fiscal 2007,2008, reductions in inventory and accounts receivable provided cash of $5.3$0.8 million. During the first ninethree months of fiscal 2008,2009, reductions in accounts payable and accrued liabilities used cash of $2.2$2.0 million, primarily due to the reductionreductions in trade payablescustomer rebates and allowances and taxes payable. This compares with cash usedprovided by a reductionan increase in accounts payable and accrued liabilities of $5.9$1.6 million in the same period of the previous fiscal year. The increase in inventory was to support the projected sales growth for the fourth quarter of fiscal 2008 and first quarter of fiscal 2009.

Net cash provided by investing activities was $1.1$0.2 million in the first ninethree months inof fiscal 2008.2009. This was comprised of salesthe final proceeds from the sale of the Company’s Stone Holding, O’Tool and Roberts UK businessesoperation of $3.6$0.3 million that was partially offset by capital expenditures of $2.8 million, which consist primarily of the purchase of a manufacturing and distribution facility in Adelanto, California for $2.1$0.1 million. Cash used inprovided by investing activities in the first ninethree months of fiscal 20072008 was $0.5less than $0.1 million, which was exclusively made upcomprised of the initial proceeds from the sale of the Company’s O’Tool operation of $0.3 million that was offset by capital expenditures.expenditures of $0.2 million.

Net cash provided by financing activities was approximately $1.9 million in the first three months of fiscal 2009 as compared to cash used in financing activities wasof approximately $3.7 million in the first nine months of fiscal 2008 as compared to approximately $2.2$4.5 million in the same period in the previous year. During the first ninethree months of fiscal 2008,2009 the Company borrowed an additional $0.5$2.6 million on its lines of credit netto fund the payment of $2.0 million of cash available underupfront consideration given to the Company’s domestic line of credit that was usedlargest home center customer in exchange for a national contract to purchase the Adelanto facility.supply specialty tools. During the first ninethree months of fiscal 2008,2009, the Company also repaid $3.5$0.6 million of long-term and acquisition. This was partially offset by long-term refinancing of $1.7 million by the Company’s Australian subsidiary debt and the settlement of the Company’s put warrant obligation of $2.3 million.debt. For the comparable fiscal 20072008 period, the Company borrowed $1.6repaid $4.1 million on its line of credit and repaid $3.9$1.8 million of long-term and acquisition debt. During this period, the Company also borrowed $1.4 million of long-term debt to finance its Australian subsidiary. Subsequent to the first quarter of fiscal 2009 and as disclosed on Form 8-K filed on July 15, 2008, the Company entered into a Rule 10b5-1 purchase plan under which it may purchase up to $2,000,000 of the Company’s common stock from time to time on the open market or in privately negotiated transactions. The Company intends to fund the repurchases through the use of existing sources of liquidity, borrowings under the current credit facility or new borrowings.

The Company has an asset based loan agreement with two domestic financial institutions to provide a revolving credit facility, mortgage and term note financing. In March 2005,May 2008, the Company amended the facility to consolidateextend the Company’s term notes and increasematurity date for the amount of borrowing capacity to $27 million through February 2006 and $29 million thereafterrevolving credit facility and the mortgage on the Canadian facility to May 20, 2011. The amendment revised the loan agreement so that the loan agreement will no longer provide for the BV loan or term loan and will consist solely of the revolving credit loan and mortgage on the Canadian facility. The amendment also made the following modifications to the loan agreement: (i) all foreign subsidiaries other than Roberts Company Canada Limited were released as borrowers under the loan agreement, (ii) all foreign subsidiaries excluding all subsidiaries in Canada, the U.K., France, Australia and New Zealand executed negative pledge agreements, and (iii) the covenants relating to the maintenance of a minimum current ratio and a minimum tangible net worth were eliminated. The total amount available for borrowing under the revolving facility usingcredit loan, the same formula for eligible accounts receivableinterest rate applicable to the borrowings outstanding and inventory that previously existed forall other covenants under the Company. The revolving facility was also extended to July 2008.loan agreement remain unchanged from the loan agreement, as amended by prior amendments. These loans are collateralized by substantially all of the Company’s assets. The agreement also prohibits the Company from incurring certain additional indebtedness, limits certain investments, advances or loans, restricts substantial asset sales and capital expenditures and prohibits the payment of dividends, except for dividends due on the Company’s Series A and C preferred stock. The loan agreement contains a subjective acceleration clause and a mandatory lockbox arrangement; therefore, the borrowing under this agreement is classified as a current liability.

On April 26, 2007, the loan agreement was amended to make certain financial covenants from February 28, 2007 through JulyAt May 31, 2008 less restrictive and to increase the ability of the Company to borrow against eligible inventory of raw material and finished goods of the Company and certain subsidiaries.

At November 30, 2007, the rate for the revolving loan facility was Libor (4.82% as of November 30, 2007)(2.83%) plus 1.75% and the Company had borrowed approximately $24.7$23.5 million and had $2.4 million available for future borrowings under theits revolving loan facility net of approximately $0.7$0.6 million in outstanding letters of credit.

The Company’s Australian subsidiary has a payment facility that allows it to borrow against a certain percentage of inventory and

accounts receivable. In March 2007, this facility was amended to make the maximum permitted borrowing approximately $1.8$2.0 million of which $1.3$1.4 million was outstanding at November 30, 2007.May 31, 2008. The facility is considered a demand note and carries an interest rate of the Australian Commercial Bill Rate (7.36%(7.94% as of November 30, 2007)May 31, 2008) plus 1.25%.

In connectionThe Company’s U.K. subsidiary has an asset based loan agreement with a domestic financial institution to provide a revolving credit facility with a borrowing capacity of $3.5 million for the Company’s U.K. operations. The facility has a term that varies with the purchaseterm of the assets of Vitrex Ltd., the Company’s United Kingdom subsidiary entered into two financing arrangements with HSBC Bank in the United Kingdom. The first financing arrangement allows for borrowing upother domestic revolving credit facility and bears an interest rate that ranges from Sterling Libor plus 1.50% to £1.0 million (approximately US $2.1 million) based on the advancement of up to 80% of the value of accounts receivable. In addition, the subsidiary may borrow up to £0.4 million (approximately US $0.8 million) against the value of the inventory. Both of these facilities areSterling Libor plus 2.25%. This agreement is collateralized by substantially all of the Company’s UK operation’s assets and is guaranteed by the Company. The agreement similarly prohibits the Company’s U.K. operations from incurring certain additional indebtedness, limits certain investments, advances or loans, restricts substantial asset sales and capital expenditures, and prohibits the payment of dividends. At May 31, 2008 the subsidiary (approximately $7.1 million) as well as a parent company guaranty. On November 30, 2007, $2.3 million was borrowed under these facilities. Both are considered short-term demand notes and have an interest rate ofwas Sterling Libor (6.09% as of November 30, 2007)(5.46%) plus 2.00%.

In July 2003, the Company refinanced its mortgage loan in Canada to finance the expansion of the Canadian physical facilities. As of November 30, 2007, the mortgage balance was $1.9 million. The mortgage bears an interest rate of Libor (5.00% as of November 30, 2007) plus 2.00%Company’s U.K. operations had borrowed approximately $2.2 million under this facility and will mature in September 2008. The mortgage loan requires payments of less thanhad $0.1 million per month. Asavailable for future borrowing. The facility is considered a result of the maturity date being within one year, the Company reclassified the entire mortgage to current liabilities during the third quarter of fiscal 2008. The Company intends to refinance the mortgage on or before maturity.demand note.

The Company believes that its existing cash balances, internally generated funds from operations and available bank lines of credit will provide the liquidity necessary to satisfy its working capital needs, including changes in working capital balances, and will be adequate to finance anticipated capital expenditures and debt obligations for the next twelve months. There can be no assurance, however, that the assumptions upon which the Company bases its future working capital and capital expenditure requirements and the assumptions upon which it bases its belief that funds will be available to satisfy such requirements will prove to be correct. If these assumptions are not correct, the Company may be required to raise additional capital through loans or the issuance of debt or equity securities that would require the consent of the Company’s current lenders.

To the extent the Company were to raise additional capital by issuing equity securities or obtaining borrowings convertible into equity, ownership dilution to existing stockholders may result, and future investors may be granted rights superior to those of existing stockholders. Moreover, additional capital may be unavailable on acceptable terms to the Company, or may not be available at all.

In connection with the subordinated loan agreement between the Company and HillStreet, entered into on April 5, 2001, the Company issued 325,000 10-year warrants (the “put warrants”) at an exercise price of $3.63 per share. Once the put warrants are put to the Company, the Company is required to pay the holder of the put warrants in cash in accordance with the warrant agreement. The payment is based on the determination of the Company’s entity value, which is defined in the warrant agreement as the greatest of: (1) the fair market value of the Company established as of a capital transaction or public offering; (2) a formula value based on a multiple of the trailing twelve month EBITDA; or (3) an appraised value as if the Company was sold as a going concern.

On July 23, 2007, the Company received written notice from HillStreet of the exercise of their right to “put” to the Company the put warrants pursuant to the warrant agreement. On July 31, 2007, the Company and HillStreet agreed upon a cash settlement value of $2.3 million for the put obligation. The Company paid the settlement out of funds available under its existing revolving credit facility.

For accounting purposes, the Company historically recorded the put warrant liability by calculating the difference between the closing stock price at the end of a reporting period and the exercise price of $3.63 per share multiplied by the 325,000 warrants outstanding. Based on this methodology, a liability of $0.9 million was reported for the put warrants as of the first quarter of fiscal 2007. As a result of the settlement, the Company reported a put warrant expense of $1.4 million in the second quarter of fiscal 2008.

Impact of Inflation and Changing Prices

During fiscal 20072008 and continuing duringinto fiscal 2008,2009, the Company experienced price increases in certain key commodities and components related to the purchase of raw materials and finished goods. The Company believes that its level of gross profit as a percent of net sales is affected by these increases. Other than the changes described, the effect of inflation on our operations has been minimal.

Recently Issued Accounting Standards

In September 2006,Refer to Note L to the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements,notes to the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (the Company’s fiscal year ending February 28, 2009). The Company is currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on the Company’s operating income or net earnings.

In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, “Effective Date of FASB Statement No. 157,” that would permit a one-year deferral in applying the measurement provisions of SFAS 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’sconsolidated financial statements onfor a recurring basis (at least annually). Therefore, if the change in fair valuediscussion of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Company’s operating income or net earnings.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value, and requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first fiscal quarter of 2008 although earlier adoption is permitted. The Company expects that SFAS No. 159 will not have an impact on its consolidated financial statements.

In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company expects that EITF 06-11 will not have an impact on its consolidated financial statements.recent accounting pronouncements.

Forward-Looking Statements

This report contains certain forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities

Litigation Reform Act of 1995. Forward-looking statements present ourthe Company’s expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They are frequently accompanied by words such as “believe”, “intend”, “expect”, “anticipate”, “plan”, or “estimate” and other words of similar meaning, and include statements relating to the Company’s liquidity sources and the adequacy of our liquiditythose sources to meet ourthe Company’s working capital needs, anticipated capital expenditures and anticipated expenditures;debt obligations for the timing ofnext twelve months; the disposition of certain assets; our ability to increase the amount of sales of our products and expected sales levels of our products; our ability to increase prices and maintain or improve our gross margins; our ability to maintain good relationships with our suppliers and major customers; our expected expenses in fiscal 2008 and future periods; our ability to pass cost increases on to our customers; our ability to continue to do business around the world; ourCompany’s ability to successfully expand ourits market share, capitalize on new customers and cross-sell ourits products; ourthe Company’s ability to introduce new and innovative products, expand existing product lines, and increase ourits sales and marketingmarket penetration; our ability to continue our performance and that of our products and to increase stockholder returns; our ability to enhance our position as a worldwide manufacturer and distributor of specialty tools; expectations regarding the growth in salespayment of the largest home improvement retailers as compared to the rate of sales growth in the overall market;dividends; expectations regarding growth trends inrecently issued accounting standards; the flooring segmentexpected impact of the home improvement market; expectations that we will continue to penetrate more foreign markets; expectations regarding the outcome of any legal proceedings in which

the Company is involved; the Company’s expectation regarding its incurrence of amortization cost for trademarks and other intangibles in fiscal 2009; the amount and manner in which the Company is involved; expectations relating to increases inmay repurchase shares of its common stock and the source of funds for stock repurchases; the Company’s sales volumeexpectation regarding the expensing of deferred costs in fiscal 2009; the fourth quarterCompany’s expectations regarding its future effective tax rate; the Company’s expectation regarding the total amount of fiscal 2008unrecognized tax benefit over the next 12 months; the cost of compliance with Environmental Laws and the beginningCompany’s anticipated expenditures on monitoring of fiscal 2009; expectations regarding tax provisions; expectations regardingwells and other environmental activity for the use of our Adelanto facility and the refinancing of a portion of the purchase price of this facility; our expectations regarding liability under environmental laws; our expectations regarding the impact of recent accounting pronouncements; and our expectation regarding our reliance on certain customers.next three years.

These forward-looking statements are based on currently available information and are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in the forward-looking statements and from historical results of operations (See RiskItem 1A-Risk Factors). Among the risks and uncertainties which could cause such a difference are the assumptions upon which we base ourthe Company bases its assessments of ourits future working capital and capital expenditures; ourthe Company’s ability to satisfy ourits working capital needs and to finance ourits anticipated capital expenditures; ourthe Company’s dependence upon a limited number of customers for a substantial portion of ourits sales and the continued success of initiatives with those customers; the success of ourthe Company’s marketing and sales efforts; interruptions in supply or price changes in the items purchased by the Company; improvements in productivity and cost reductions; increased pricing pressures from customers and competitors and the ability to defend market share in the face of price competition; ourthe Company’s ability to maintain and improve ourits brands; ourthe Company’s reliance upon certain major foreign suppliers; ourthe Company’s reliance upon suppliers and sales agents for the purchase of finished products which weare then resell;resold by it; the level of demand for ourthe Company’s products among existing and potential new customers; ourthe state of the housing, residential and commercial construction and home improvement markets; the Company’s ability to successfully integrate ourits acquired businesses; ourthe Company’s dependence upon the efforts of Mr. Lewis Gould, ourthe Company’s Chief Executive Officer and certain other key personnel; ourthe Company’s ability to successfully integrate new management personnel; ourpersonnel into the Company; the Company’s ability to accurately predict the number and type of employees required to conduct ourits operations and the compensation required to be paid to such personnel; ourthe Company’s ability to manage ourits growth, and the risk of economic and market factors affecting usthe Company or ourits customers; the availability of shares of common stock for repurchases; the availability of cash to effect stock repurchases; fluctuations in the market price of the Company’s common stock; the impact of new accounting standards;standards on the possibility of aCompany; the Company’s belief that there will be no future adverse effect on the fair value of ourthe Company’s goodwill or other intangible assets; decisions by management related to accounting issues, and regulation and litigation matters; the general economic conditions in North America and the world; and other risks and uncertainties described elsewhere herein and in other reports we have filed by the Company with the SEC.Securities and Exchange Commission.

All forward looking statements included herein are made only as of the date such statements are made and except as required by law, we dothe Company does not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or of which hethe Company hereafter becomebecomes aware. Subsequent written and oral forward-looking statements attributable to usthe Company or persons acting on ourits behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in this report and in other reports filed by the Company with the Securities and Exchange Commission.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s international operations are subject to risks, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility when compared to the United States. Accordingly, the Company’s future results may be materially adversely impacted by changes in these or other factors. The Company currently does not utilize currency forward exchange contracts or any other instrument to hedge foreign currency denominated transactions.

International sales from the Company’s non-North American operations accounted for approximately 24% and 23% of total sales during the three and nine months ended November 30, 2007. International sales are generated from foreign subsidiaries and are typically denominated in the local currency of each country. Generally, these subsidiaries incur most of their expenses in local currency and, accordingly, use the local currency as their functional currency. The Company estimates that a 10% change in the U.S. Dollar against local currencies would have changed its operating income by approximately $0.3 million in the nine months ended November 30, 2007.

The Company is also exposed to certain market risks that are inherent in its financial instruments. The Company averaged $32.5 million of variable rate debt during the nine months ended November 30, 2007. If interest rates would have increased by 10%, the effect on the Company’s financial statements would have been an increase in interest expense of approximately $0.2 million for the nine months ended November 30, 2007.Not required.

Evaluation of Disclosure Controls and Procedures

In connection with the audit for the Company’s fiscal years ending February 28, 2005 through 2007, the Company and its independent auditors identified material weaknesses in the Company’s internal control over financial reporting relating todescribed more fully below, the Company’s disclosure controls and procedures were not effective as of May 31, 2008.

Internal Control Material Weaknesses and Remediation Steps

As disclosed in the Company’s Form 10-K for (i)the year ended February 29, 2008, as a result of the Company’s evaluation of the effectiveness of its internal controls over financial reporting, management identified the following material weaknesses:

The Company has implemented and continues to implement various measures to address the identified material weaknesses and to improve the overall internal control over financial reporting, including without limitation, (a) hiring of additional personnelreporting. The following steps are planned for fiscal 2009 to respondremediate the conditions leading to the financial reportingabove stated material weaknesses:

Changes in Internal Control over Financial Reporting

There were no changes during the quarter ended May 31, 2008 in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

PART II. OTHER INFORMATION

On October 15, 2007, the court entered an order of dismissal approving the Stipulation of Dismissal Without Prejudice jointly filed by the plaintiff and the Company on October 4, 2007 as to the Company as a Defendant, providing for the voluntary dismissal of plaintiff’s claims against the Company in Greene v. Ashland Chemical, Inc., et al., Case No. 03-CV-231458, Div. 7, which matter was pending in the Circuit Court of Jackson County, Missouri at Kansas City. In this wrongful death matter, the plaintiff alleged that the Company, and Roberts Consolidated Industries, Inc., a wholly owned subsidiary of the Company, along with more than 30 other defendants, manufactured products containing benzene with which the plaintiff came into contact while working between approximately 1954 and 1999, and which allegedly caused his death. This action was originally instituted against the Company on August 11, 2006, when the plaintiff served the Company with a petition for unspecified damages. An answer to the complaint was filed in December 2006 denying the allegations and asserting several defenses.

On December 13, 2007, the court entered an Order and Judgment approving the confidential settlement reached in mediation that occurred on November 16, 2007, in the case of Imogene Calcaterra-Lepique and C.C., by and through her Next Friend, Brenda O’Neal v. Q.E.P. Co., Inc. and Roberts Consolidated Industries, Inc., Home Depot, Inc., General Electric Co., and Rheem Mfg. Co., Case No. 4:06-CV-1050 CAS, which matter was pending in the US District Court for the Eastern Distinct of Missouri. The Company’s insurers funded the Company’s settlement payment in its entirety. In this wrongful death case, originally instituted against the Company on July 12, 2006, plaintiffs alleged that the decedent suffered burns, allegedly causing his death, when installing carpet using Roberts 4000 carpet adhesive, a product manufactured by Roberts Consolidated Industries, Inc., a wholly owned subsidiary of the Company. Plaintiffs alleged that fumes from the Roberts 4000 caused the fire that injured the decedent. The plaintiff originally sought $20,000,000 in damages.

On October 29, 2007, Roberts Consolidated Industries, Inc. and Roberts Holding International, Inc., wholly owned subsidiaries of the Company, received a notice of claim for indemnity from International Paper Corporation, one of many defendants named in a Verified Complaint in the lawsuit captioned John Rosebery et al v. 3M Marine, et al., Index No. 21464/07, pending in the New York Supreme Court, County of Suffolk. The plaintiff alleges that he contracted leukemia as a result of exposure to benzene in various products allegedly manufactured and distributed by several defendants, including International Paper Corporation or its predecessors. Although Roberts Consolidated Industries, Inc. and Roberts Holding International, Inc. are not named as defendants in the action,

International Paper Corporation has stated in the demand for indemnity that “the products identified by Mr. Rosebery appear to be products which, as of December 31, 1975, were products of Roberts.” The Company has responded on behalf of its subsidiaries to International Paper’s demand by requesting that International Paper provide additional documentation and information regarding the contentions. Insufficient information exists at this time for the Company to opine on the merits, if any, of the claim for indemnity or the underlying claims.

The Company is involved in litigation from time to time in the course of business. Based on information currently available to management, the Company does not believe that the outcome of any of the legal proceedings in which the Company is involved will have a material adverse impact on the Company (see Note K of the Company’s Notes to Consolidated Financial Statements).

The Company, isits operations and performance are subject to the following risk factors.risks. While the Company believes that its expectations are reasonable, they are not guarantees of future performance. The Company’s results could differ substantially from its expectations if any of the events described in these risks occur.

The Company may be unable to pass on to its customers increases in the costs of raw materials and finished goods.

The costs of many of the Company’s raw materials and finished goods vary with market conditions. The Company’s costs of raw materials and fuel-related costs continue to increase and are likely to increase further due to the historically high price of oil and gas and other market conditions. In addition, the costs of many of the Company’s finished goods are impacted byThere have been no material changes in currency exchange rates, tax regulations affecting the Company’s suppliers, freight costs and the costs of suppliers’ raw materials. Additionally, the increasing volatility of the foreign exchange markets and changes in tax incentives available to the Company’s Chinese suppliers is likely to result in increased volatilityrisk factors from those disclosed in the Company’s ability to reasonably project future costs. Although the Company generally attempts to pass on increases in its costs to its customers, the Company’s ability to pass these increases on varies depending on the customer, product line, rate and magnitude of any increase. There may be periods of time during which increases in these costs cannot be recovered. During such periods of time, the Company’s profitability may be materially adversely affected.

The Company’s largest customers seek to purchase product directly from foreign suppliers.

Certain of the Company’s larger customers have in the past contacted one or more of the Company’s foreign suppliers to discuss purchasing home improvement products directly from these suppliers. Although the Company believes that its diversified product line, brand recognition and customer service will continue to offer benefits not otherwise available to the Company’s customers from foreign manufacturers, the Company could experience competition from one or more foreign manufacturers that now serve as suppliers to the Company.

The Company depends on a limited number of customers, and the loss of one or more of these customers could adversely affect our business.

In particular, the Company is substantially dependent on two of its customers, Home Depot and Lowe’s, for a large percentage of its revenues. The Company expects that it will continue to rely upon these customers for a significant portion of its revenues. Any significant reduction in business with Home Depot or Lowe’s as a customer of the Company would have a material adverse effect on the financial position and results of operations of the Company.

The Company has foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which it operates.

Because a portion of the Company’s business is conducted in foreign currencies, fluctuations in currency prices can have a material impact on its results of operations. As a result of the fluctuations in currency prices, the Company had a total foreign exchange benefit on net revenue of approximately $2.2 million and $4.7 million during the three and nine months ended November 30, 2007. Although the Company finances certain foreign operations utilizing debt denominated in the currency of the local operating unit in order to mitigate its foreign currency exposure, the Company cannot predict the effect foreign currency fluctuations will have on its results of operations in future periods.

The Company estimates that a 10% change of the US dollar against local currencies would have changed its operating income by approximately $0.1 million and $0.3 million in the three and nine months ended November 30, 2007. However, this quantitative measure has inherent limitations. The sensitivity analysis disregards the possibility that rates can move in opposite directions and that changes in currency may or may not be offset by losses from another currency.

The translation of the assets and liabilities of international operations is made using the currency exchange rates as of the end of the fiscal year. Translation adjustments are not included in determining net income but are disclosed asAccumulated Other Comprehensive Income within shareholders’ equity. In certain markets, the Company could recognize a significant gain or loss related to unrealized cumulative translation adjustments if it were to exit the market and liquidate its net investment. As of November 30, 2007, the net foreign currency translation adjustments reduced shareholders’ equity by $0.7 million.

Failure to identify suitable acquisition candidates, to complete acquisitions and to integrate successfully the acquired operations.

As part of its business strategy, the Company continues to evaluate acquisitions that could enhance its current product line, manufacturing capabilities and distribution channels either in the United States or around the world. Although the Company regularly evaluates acquisition opportunities, it may not be able to successfully identify suitable acquisition candidates, obtain sufficient financing on acceptable terms to fund acquisitions, or profitably manage the acquired businesses. In addition, the Company may not be able to successfully integrate the acquired operations and the acquired operations may not achieve the expected results.

The Company has been, and in the future may be subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant.

The Company is subject to federal, state and local laws, regulations and ordinances governing activities or operations that may have adverse environmental effects, such as discharges to air and water, and handling and disposal practices for solid, special and hazardous wastes. The activities of the Company, including its manufacturing operations at its leased facilities, are subject to the requirements of Environmental Laws. The Company has received various notices from state and federal agencies that it may be responsible for certain environmental remediation activities and is, or has been, a defendant in environmental litigation. Although the Company is not currently aware of any situation requiring remedial or other action that would involve a material expense to the Company or expose the Company to material liability under Environmental Laws, the Company cannot provide assurance that it will not incur any material liability under Environmental Laws in the future or that it will not be required to expend funds in order to effect compliance with applicable Environmental Laws, either of which could have a material adverse effect on the Company.

The Company faces intense competition in its industry, which could decrease demand for its products and could have a material adverse effect on its profitability.

The Company’s industry is highly competitive. The Company faces competition from a large number of manufacturers and independent distributors. Many of its competitors are larger and have greater resources and access to capital than the Company. In order to maintain the Company’s competitive position, the Company will need to continue to develop new products and expand its customer base both domestically and internationally. Competitive pressures may also result in decreased demand for the Company’s products. Any of these factors could have a material adverse effect on the Company.

The Company may not be able to retain key personnel or replace them when they leave.

Senior management changes, including, without limitation to Lewis Gould, the Company’s Chief Executive Officer, could disrupt the Company’s ability to manage its business, and any such disruption could adversely affect the Company’s operations, growth, financial condition and results of operations. The Company’s success is also dependent upon its ability to hire and retain qualified finance and accounting, operations, and other personnel. The Company cannot assure you that it will be able to hire or retain the personnel necessary for its planned operations or that the loss of any such personnel will not have a material impact on the Company’s financial condition and results of operation.

The Company’s inability to maintain access to the debt and capital markets may adversely affect our business and financial results.

The Company’s ability to invest in its business, refinance maturing debt obligations and make strategic acquisitions may require access to sufficient bank credit lines and capital markets to support short-term borrowings and cash requirements. If the Company’s current level of cash flow is insufficient and it is unable to access additional resources, the Company could experience a material adverse affect on its business and financial results.

The Company has debt service obligations which are subject to restrictive covenants that limit the Company’s flexibility to manage its business and could trigger an acceleration of the Company’s outstanding indebtedness.

The Company’s credit facilities require that the Company maintain specific financial ratios and comply with certain covenants, including various financial covenants that contain numerous restrictions on the Company’s ability to incur additional debt, pay dividends or make other restricted payments, sell assets, or take other actions. Furthermore, the Company’s existing credit facilities are, and future financing arrangements are likely to be, secured by substantially all of the Company’s assets. If the Company breaches any of these covenants, a default could result under one or more of these agreements. The Company has in the past violated certain covenants under its credit facilities and cannot provide assurance that it will not violate certain covenants in the future. A default, if not waived by the Company’s lenders, could result in the acceleration of outstanding indebtedness and cause the Company’s debt to become immediately due and payable.

The Company and its independent auditors have identified material weaknesses in the Company’s internal control over financial reporting and the Company cannot assure you that additional material weaknesses will not be identified in the future.

The Company and its independent auditors have identified material weaknesses in the Company’s internal control over financial reporting relating to the Company’s procedures for (i) reconciling intercompany balances, (ii) ensuring proper documentation and review of consolidating adjusting journal entries, and (iii) reviewing the financial results of its foreign subsidiaries. Under current standards of the Public Company Accounting Oversight Board, a material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Although the Company has implemented, and continues to implement, various measures to improve internal control over financial reporting, there can be no assurance that the Company will be able to remedy the material weaknesses that have been identified or that additional material weaknesses will not be identified by the Company or its independent auditors. Any failure to remediate the material weaknesses identified by the Company and its independent auditors or to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results, cause the Company to fail to meet its reporting obligations or result in material misstatements in the Company’s financial statements. Any such failure also could affect the ability of the Company’s management to certify that the Company’s internal controls are effective when it provides an assessment of internal control over financial reporting pursuant to rules of the Securities and Exchange Commission under Section 404 of the Sarbanes-Oxley Act of 2002, when they become applicable to the Company beginning with the Annual Report on Form 10-K for the year endingended February 29, 2008, and could affect the results of the Company’s independent registered public accounting firm’s attestation report when it becomes applicable for the year ending February 28, 2009. Inferior internal controls could also cause investors to lose confidence in the Company’s reported financial information, which could have a negative effect on the trading price of the Company’s stock. For more discussion, see Part I, Item 4T—Controls and Procedures.2008.

The Company may be required to record a significant charge to earnings if it determines that its goodwill or other intangible assets arising from acquisitions are impaired.

The Company is required to review its goodwill and other intangible assets for impairment in accordance with Statement of Financial Accounting Standards No. 142 at least annually or when events or changes in circumstances indicate the carrying value may not be recoverable. If the Company determines that significant impairment has occurred in the future, it would be required to write off goodwill or other intangible assets. The Company’s annual impairment assessment date is August 31^st.

The Company performed an impairment test during the second quarter of fiscal 2008 and determined that there was no impairment to goodwill. The impairment test in the previous fiscal year resulted in a final impairment charge of $7.5 million. Any future impairment charges could have a material adverse effect on our financial condition, earnings and results of operations and could cause our stock price to decline.

Item 6.

Exhibits

SIGNATURES

Pursuant to the requirements 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.

EXHIBIT INDEX

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