UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended August 31,November 30, 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 smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 October 13, 2008January 21, 2009 is 3,381,2293,368,585 shares of Common Stock, par value $0.001 per share.

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

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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 “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 29, 2008 (“fiscal 2008”). The results of operations for the three and sixnine months ended August 31,November 30, 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.

The Company’s fiscal year ends on February 28, 2009 (“fiscal 2009”). All references to the first, second and secondthird quarter of fiscal 2009 are to the quarter ended May 31, 2008August 31 and August 31,November 30, 2008, respectively.

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^®, Vitrex^®, PRCI^® and Elastiment™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.

The Company had breached certain financial covenants under the domestic credit facility as of November 30, 2008 and, accordingly, was in default under that credit facility and under certain other international and domestic facilities. As a result, the Company entered into a Forbearance Agreement through March 16, 2009 applicable to the Company’s domestic credit facility. See Note E – Debt. There can be no assurance that the Company will be in compliance with the terms of its credit facilities upon the termination of the Forbearance Agreement, or able to either amend its credit facilities or obtain continued forbearance on terms acceptable to the Company, or at all. If the lenders elect to pursue their remedies under one or more of the credit facilities, including limiting or terminating the Company’s right to borrow, the Company may be unable to obtain the liquidity it needs to continue its operations as a going concern.

NOTE B – Inventories

Inventories consisted of the following (in thousands):

NOTE C – Goodwill and Other Intangible Assets

Intangible assets with definite lives are amortized or expensed while intangiblesexpensed. 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 using information available at May 31st. The Company performed an impairment test during the second quarter of fiscal 2009 and determined that there was no impairment to goodwill. However, deterioration in the credit markets has created substantial general market volatility resulting in significant declines in the market values of a broad range of equity securities. The Company’s market valuation similarly has been affected by these market conditions, which market valuation is a critical consideration in the determination of the fair value of the Company’s reporting units.

Accordingly, the Company updated the fair value of its reporting units used in the impairment test performed in the second quarter of fiscal 2009. The updated valuations considered market approaches, the present value of future cash flows and the market valuation of the Company as at November 30, 2008. As a result, the fair value of certain of the Company’s reporting units was below their carrying amounts and the Company recorded a non-cash charge of $7.9 million for the impairment of goodwill. The non-cash charge was recorded in the Company’s Domestic ($6.5 million), Australia/New Zealand ($1.1 million) and European ($0.3 million) segments. After the third quarter non-cash charge for impairment, $0.9 million of goodwill remains in the Canada segment; no balance remains in the Domestic, Australia/New Zealand, European or Other segments.

The Company will continue to assess the impairment of goodwill and other intangible assets in the future. Iffuture, which assessment may continue to be affected by adverse changes in the Company’s market valuation or in its operating performance and resulting cash flows in the future are less than expected, an additional impairment charge could be incurredand which may have a material impact on the Company’s future results of operations.

AsGoodwill as of August 31,November 30, 2008 includes a reduction related to foreign currency translation for the Company had $6.5three and nine months ended November 30, 2008 of $0.6 million of goodwill in the Domestic segment, $1.0and $0.9 million, in the Canada segment, $0.3 million in the Europe segment and $1.6 million in the Australia/New Zealand segment.respectively.

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

The Company incurred approximately $0.1 million and $0.2 million of amortization cost for trademarks and other intangibles in the three and sixnine months ended August 31,November 30, 2008. The Company expects to incur a total of approximately $0.3 million of amortization cost for trademarks and other intangibles in fiscal 2009. Other intangibles include customer lists, non-compete agreements and patents.

NOTE D – Deferred Costs

The Company records the upfront consideration given to customers associated with future purchase agreements as deferred costs within the noncurrent assets classification. These deferred costs are expensed as a reduction to sales on a straight line basis over the term of the agreement, currently approximately three years.agreement. As of August 31,November 30, 2008, the Company had unamortized deferred costs of $3.0$2.6 million. No deferred costs were recorded as of February 29, 2008. The Company evaluates the impairment of deferred costs on a quarterly basis.

The Company expensed approximately $0.4 million and $0.7$1.1 million of deferred costs in the three and sixnine months ended August 31,November 30, 2008. The Company expects to expense approximately $1.5$1.4 million of deferred costs in fiscal 2009.

NOTE E – Debt

General

The Company has breached certain financial covenants under its revolving credit facility and its Canadian mortgage facility as of November 30, 2008 as a result of its third quarter fiscal 2009 operating loss. Accordingly, the Company was in default under the revolving credit facility and the Canadian mortgage facility, as well as under certain other international and domestic facilities. Unless waived by the lenders, the lenders have the right to prohibit additional borrowing under the facilities, accelerate the Company’s indebtedness under the facilities, and take other actions as provided for in each of the credit facilities. On January 22, 2009, the Company entered into a Forbearance Agreement applicable to the Company’s revolving credit facility and its Canadian mortgage facility.

Revolving Credit Facility

The Company has an asset based loan agreement with two domestic financial institutions to provide a revolving credit facility and mortgage and term note financing. In August 2008, the Company amended the loan agreement to increase maximum amount of borrowing available to the Company under the revolving credit facility from $29 million to $33 million and the interest rate applicable to the revolving credit facility by 25 basis points to a range of Libor plus 1.75% to Libor plus 2.50%. All covenants under the loan agreement remained unchanged from the loan agreement, as amended by prior amendments. These loansfinancings are collateralized by substantially all of the Company’s assets. The agreement alsoallows the Company to borrow against a certain percentage of accounts receivable and inventories. The interest rate applicable to the revolving credit facility ranges from Libor plus 1.75% to Libor plus 2.50% or, in the event of default, the interest rate otherwise applicable under the loan agreement plus 2.00%. The agreement 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 facility matures in May 2011. The loan agreement contains a subjective acceleration clause and lockbox arrangement; therefore, the borrowing under this agreement is classified as a current liability.

As of August 31, 2008,Pursuant to the Company was in violationterms of the financial covenantForbearance Agreement, the borrowing available under the revolving credit facility that requireswas reduced from $35 million to $30 million and the Companylenders agreed to maintain a certain liabilitiesforbear from exercising any of their default rights and remedies in response to tangible net worth ratio. On October 8, 2008, the loan agreement was amended to change the liabilities to tangible net worth ratio as well as certain other financial covenants. As a resultoccurrence and continuance of the amendmentdefault through March 16, 2009, subject to the Company was brought intoCompany’s compliance with all ofcertain requirements enumerated in the financial covenant requirements.Forbearance Agreement.

At August 31,November 30, 2008, the interest rate under the revolving credit facility was Libor (2.47%(1.44%) plus 1.75%, the Company had borrowed approximately $30.6$28.2 million and had $1.8$0.9 million available for future borrowings, net of approximately $0.6$0.5 million in outstanding letters of credit. The facility matures in May 2011.Effective with the implementation of the Forbearance Agreement, the revolver bears an interest rate of Libor plus 4.50%.

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. The maximum permitted borrowing under the payment facility is approximately $2.0 million of which $1.3 million was outstanding at August 31, 2008. The facility is considered a demand note and carries an interest rate of the Australian Commercial Bill Rate (7.23% as of August 31, 2008) plus 1.25%. The facility matures in March 2010.

The Company’s U.K. subsidiary has an asset based loan agreement with a domestic financial institution to providethat provides a revolving credit facility withthat allows the subsidiary to borrow against a borrowing capacitycertain percentage of accounts receivable and inventories up to $3.5 million formillion. The facility includes cross-default provisions with the Company’s U.K. operations. Theother domestic revolving credit facility and has aan interest rate and term that varies with the interest rate and term of the Company’s other domestic revolving credit facility and bears an interest rate that ranges from the Sterling reference rate or Libor plus 1.75% to the Sterling reference rate or Libor plus 2.50%.facility. This agreement is collateralized by substantially all of the Company’s U.K. 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 August 31,November 30, 2008 the interest rate was the financial institution’s Sterling reference rate (5.10%(3.10%) plus 1.75%. The, the Company’s U.K. operations had borrowed approximately $2.2$1.7 million under thisthe facility and had $0.1 million was available for future borrowing. Effective with the implementation of the Forbearance Agreement, the U.K. facility bears an interest rate of the financial institution’s Sterling reference rate or Libor plus 4.50%. The facility is considered a demand note.

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

receivable and inventories. The maximum permitted borrowing under the payment facility is approximately $1.3 million of which $1.0 million was outstanding at November 30, 2008. The facility is considered a demand note and is guaranteed bycarries an interest rate of the parent company.Australian Commercial Bill Rate (4.10% as of November 30, 2008) plus 1.25%. The facility matures in March 2010.

The Company’s French subsidiary has a line of credit with three French financial institutions that allow it to borrow an aggregate of approximately $2.0$1.6 million against drafts presented for future settlement in payment of the subsidiary’s accounts receivable. As of August 31,November 30, 2008, the facilities bear interest rates that range from the Euro OverNight Index Average (4.36%(2.97%) plus 1.00% to the Euro Interbank Offer Rate (4.40%(3.15%) plus 1.50% and the subsidiary had borrowed approximately $0.1$0.4 million under these facilities.

Term Loan Facilities

The Company had a term loan financing arrangement under the asset basedits domestic loan agreement that provided for repayment of this facility at a rate of $0.2 million per month. The term loan was fully repaid during the first quarter of fiscal 2009.

The Company’s Australian subsidiary has a term facility that matures in March 2010. The loan requires quarterly payments of AUD 0.1 million (US $0.1 million) with a final balloon payment. The balance of this term note was US $1.1$0.7 million at August 31,November 30, 2008. The term loan is collateralized by substantially all of the assets of the subsidiary as well as a parent company guaranty.and is guaranteed by the Company.

Mortgage FacilityFacilities

The Company has a mortgage facility collateralized by its manufacturing, distribution and administrative facility in Canada. In May 2008, the Company entered into an agreement with its existing lenders to renew the Canadian mortgage for an additional three years. In June 2008, the Company amended its loanthe facility to draw down an additional CAD 0.5 million (US$ 0.50.4 million) under the existing Canadian mortgage.. As of August 31,November 30, 2008, the mortgage balance was $2.1$1.8 million. The mortgage bears an interest rate of Libor (3.14%(3.10% as of August 31,November 30, 2008) plus 2.00% or, in the event of default, Libor plus 4.00%, and will maturematures in May 2011. The mortgage loan requires payments of less than $0.1 million per month.

The Company also has a mortgage agreementfacility collateralized by its manufacturing and distribution facility located in Adelanto, California. As of August 31,November 30, 2008, the mortgage balance iswas approximately $1.6 million. The mortgage bears an interest rate of Libor (2.47%(1.44% at August 31,November 30, 2008) plus 1.50% and, will mature in February 2013.2013 and includes cross default provisions. The mortgage loan requires principal payments of less than $0.1 million per month with a balloon payment on maturity. In the event that the mortgage is declared to be in default as a result of the implementation of the Forbearance Agreement, unless waived by the mortgagor, the mortgagor could accelerate the Company’s indebtedness thereunder and increase the interest rate or take other actions as provided for in the facility.

As a result of the implementation of the Forbearance Agreement, the noncurrent portion of the mortgage facilities has been reclassified to current liabilities and included in current portion of long term debt.

Other Debt

At November 30, 2008, the outstanding balance of an unsecured note issued in connection with a 1999 acquisition was approximately $0.3 million with an interest rate of 7%; the outstanding balance of an unsecured note issued in connection with a 2004 acquisition was approximately $0.3 million with an interest rate equal to the EURIBOR three month rate (3.85%); and the outstanding balance of an unsecured note issued in connection with a 2005 acquisition was approximately $0.1 million with an interest rate equal to the Australian 180-day commercial bill rate (4.10%).

NOTE F – 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, 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.

The Company uses the Black-Scholes model, which requires the input of subjective assumptions, to value stock options and stock appreciation rights. 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. The 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 sixnine months of fiscal 2009 or during fiscal 2008.

The fair value of each option at date of grant was estimated using 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 interest 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 the stock appreciation rights outstanding as of August 31,November 30, 2008:

For both the three and sixnine months ended August 31,November 30, 2008, the Company recognized compensation income of less than $0.1 million related to stock options issued and stock appreciation rights granted in previous periods. This amount is included in general and administrative expenses.

On August 8, 2008, the Company issued 3,000 shares of restricted stock to its non-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 G – Income Taxes

The Company recorded a provisionbenefit for income taxes infor the second quarter of fiscal 2009three months ended November 30, 2008 of approximately $0.6$0.5 million (43%(6% effective tax rate), inclusive of valuation allowances on foreign net operating losses of approximately $0.1 million. This compares with and a provision for income taxes infor the second quarter of fiscalnine months ended November 30, 2008 of approximately $1.5$0.9 million (96% effective tax rate), inclusive of US taxes on foreign deemed dividends of approximately $0.1 million and foreign net operating losses of approximately $0.2 million in the same period in fiscal 2008. For the six months ended August 31, 2008, the Company recorded a provision for income taxes of $1.4 million (40%

(-16% effective tax rate). This compares with a provision for income taxes of $2.6approximately $0.5 million (74%(39% effective tax rate), inclusive of US taxes on foreign deemed dividends of approximately $0.4 and $3.1 million and foreign net operating losses of

approximately $0.2 million in(65% effective tax rate) for the same period inperiods of fiscal 2008.

In all periods presented, the Company’s tax benefits or provisions use the statutory tax rates in each jurisdiction in which the Company operates in estimating its current tax obligations and its deferred income taxes to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts, as adjusted for estimated

valuation allowances. Approximately $6.7 million of the third quarter impairment loss on goodwill does not generate an income tax benefit in the tax jurisdictions that have been affected by the loss, the change in the put warrant liability is non-deductible for tax purposes. Thepurposes and a valuation allowance on foreign net operating losses was recorded of approximately $0.1 million and $0.2 million for the three and nine months ended November 30, 2008 and of approximately $0.2 million and $0.5 million for the same periods of fiscal 2008. In addition, a change in the Company’s estimate of fiscal 2009 and 2008 provisions were based uponeffective tax rate during the third quarter of fiscal 2009 reduced the third quarter tax benefit by $0.3 million. Accordingly, the effective rate in each of the periods presented was in excess of our statutory tax rates available in every jurisdiction in which the Company operates.rates.

In accordance with FIN 48, the Company recognized an increase of approximately $0.1 million in the liability for unrecognized tax benefits associated with uncertain income tax positions for both the three and sixnine months ended August 31,November 30, 2008. The liability for unrecognized tax benefits was $0.5 million at August 31,November 30, 2008. Any benefit ultimately recognized will reduce the Company’s annual effective tax rate. The Company is subject to income taxes in

After adjustment for each of these differences, the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to interpretation of the relatedeffective tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2003. The Company has concluded its examination with the U.S. federal taxing authoritiesrate for fiscal year 2005. The Company does not expect2009 was 43.7% and the total amount of unrecognizedeffective tax 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 and had approximately $0.1 million of interest and penalties accrued at August 31, 2008.rate for fiscal 2008 was 38.5%.

NOTE H – 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. For both the three and sixnine months ended August 31, 2008, there were approximately 0.1 million of common stock equivalent shares excluded from the dilutive earnings per share calculation because they were anti-dilutive. For the three and six months ended August 31,November 30, 2007, the amount of anti-dilutive shares were less than 0.1 million and 0.2 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):

NOTE I – Comprehensive Income

The Company records foreign currency translation adjustments as other comprehensive income. For the three and nine months ended August 31,November 30, 2008, and 2007 comprehensive loss was $0.3$10.8 million and $0.8$10.1 million, respectively. For the sixthree and nine months ended August 31, 2008 andNovember 30, 2007, comprehensive income was $0.7$2.7 million in both periods.and $3.4 million, respectively.

Note J – Segment Information

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,Cash, debt and income taxes are managed 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):

The results fromfor the Canadian operations do not contain allocationsthree and nine months ended November 30, 2008 include a non-cash charge for impairment of corporate expensesgoodwill of $6.5 million in Domestic, $1.1 million in Australia/New Zealand and sales infrastructure and their product costs are not burdened based on Canada’s level of sales to external customers.$0.3 million in Europe segments.

Amounts are attributed to the country of the legal entity that recognized the sale or holds the assets. Intercompany sales are billed at prices established by the Company. The prices take into account, among other things, the product cost and overhead of the selling location.

NOTE K – Contingencies

The Company is involved in litigation from time to time in the ordinary 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. From fiscal 1999 through the third quarter of fiscal 2008,2009, the Company has spent approximately $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 August 31,November 30, 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 onin December 27, 2002 wherebyagainst Roberts Holdings International, Inc. (“Roberts Holding”), an inactive subsidiary of the Company, was named as a third party defendant in a case beforewhich 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 $40,000 per year beginningfor five years. In accordance with the settlement agreement, the final payment was made in October 2004 for five consecutive years in settlement of this action.2008.

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, includingsuit has been dismissed against International Paper Corporation orwithout any payment and it is unknown at this time whether it will seek indemnification for costs incurred in its predecessors. Althoughdefense.

On June 13, 2008, the Company, and Roberts Consolidated Industries, Inc. and Roberts Holding International,Capitol, Inc. are not, wholly-owned subsidiaries of the Company were named as defendants in the action, International Paper Corporation has statedan environmental suit brought by Barrett Properties, LLC and CEA, LLC (CEA) in the demand for indemnity that “the products identified by Mr. Rosebery appearSuperior Court of Whitfield County, Georgia. Plaintiffs are the owner and former owner of real property on which Roberts Capitol, Inc. (Roberts Capitol) currently operates a facility manufacturing adhesives. The complaint alleges the discharge of hazardous waste in 1995, ten years before Roberts Capitol began to be products which, as of December 31, 1975, were products of Roberts.” The Company has responded on behalf of its subsidiariesoccupy the premises, and since 2005 when Roberts Capitol began to

International Paper’s demand by requesting that International Paper provide additional documentation and information regarding occupy the contentions. Insufficient information exists at this time for the Company to opine on the merits, if any,premises. As of the claim for indemnity ordate of the underlying claims.filing of the complaint, CEA alleged that it had incurred clean up costs in the amount of approximately $0.4 million. Roberts Capitol and the two affiliated companies have denied all liability and intend to contest the claims vigorously.

NOTE L – Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“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. For financial assets and liabilities, this statement is effective for fiscal periods beginning after November 15, 2007 and does not require any new fair value measurements. In February 2008, the FASB Staff Position No. 157-2 was issued which delayed the effective date of FASB Statement No. 157 to fiscal years endingbeginning after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 did not have a material effect on the consolidated financial statements. The Company is 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 result 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 effective for financial statements issued for fiscal years beginning after December 15, 2008 (the Company’s fiscal year ending February 28, 2010) and interim periods within those fiscal years. The Company is currently evaluating the effect, if any, of this statement on its consolidated financial statements.

In December 2007, the FASB 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 result 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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159), which allows entities the option to measure eligible financial instruments at fair value as of specified dates. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. The provisions of SFAS No. 159 were effective for the Company beginning March 1, 2008. Upon adoption, the Company did not elect the fair value option for any items within the scope of SFAS No. 159 and, therefore, the adoption of SFAS No. 159 did not have an impact on its consolidated financial statements.

NOTE M – Subsequent Event

On October 8, 2008,January 22, 2009, the Company amended its loan agreemententered into a Forbearance Agreement with two domestic lenders to change certain financial covenants (seelenders. See Note E).

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 aCompany’s growth strategy intended to improveis directed at improving overall performance and profitability of operations thatand includes expanding product offerings and increasing penetration with its largest customers, expanding market share by obtaining new customers, introducing new and innovative products, and enhancing the cross selling of products among its channels of distribution.distribution, and implementing cost reduction and cash management measures discussed below.

For

During the secondthird quarter of fiscal 2009, the continued weakness and further deterioration of the economic environment made it a very challenging operating environment for our industry. Falling home prices, increases in foreclosure rates, decreases in new construction, increases in unemployment rates, significant declines in the equity markets, a tightening of credit availability, and concerns about the general health of the global economy have led to a significant decline in consumer confidence and consumer discretionary spending resulting in a significant softening of the residential and commercial improvement and construction markets. This softening of the residential and commercial improvement and construction markets along with the continued weakness and further deterioration of the global economic environment in the third quarter of fiscal 2009 led to a decrease in sales by customers in almost all of the markets in which we operate and in the implementation of inventory management programs by our most significant customers. Although the effects of the challenging global economic environment were more sharply experienced by our domestic segment, our international segments also felt the economic pressure that we have been experiencing in the U.S. As a result, net sales decreased 11.0% to $48.6 million in the third quarter of fiscal 2009 from $54.6 million in the comparable fiscal 2008 quarter.

Additionally, the deterioration in the global economic environment has resulted in significant volatility in the global currency markets. Substantially all of the revenues of our international operations are denominated in currencies other than the U.S. dollar, including the Canadian dollar, the Euro and the Australian dollar, although significant portions of our international operations’ purchases are priced in U.S. dollars. Most recently, currency volatility has resulted in a substantial strengthening of the U.S. dollar against these three currencies. A relatively stronger U.S. dollar means that the revenues of our international operations will translate into lower U.S. dollar amounts. Moreover, inflationary pressures in China and the general strengthening of the Chinese Renminbi against the U.S. dollar during the year put increased pressures on pricing from major suppliers.

As we look forward to the balance of fiscal year 2009 and the full fiscal year 2010, it is extremely difficult to project how long the weakness in the global economic environment will continue and whether the global economic environment will deteriorate any further, which would further negatively impact our results of operations.

Due to the current global economic environment and the corresponding decline in sales, earnings and cash flow, and a potential for additional declines in subsequent periods if the global macroeconomic trends continue, we are taking significant actions to reduce expenses and adjust our operating plans. Our cost reduction and cash management measures include workforce reductions, business restructuring, reduced work schedules for manufacturing and distribution personnel, salary reduction and restoration program applicable to all salaried personnel, reductions in planned expenses, and tighter purchasing, inventory and working capital management.

As indicated above, for the third quarter of fiscal 2009, sales increaseddecreased by approximately $3.8$6.0 million or 7%11% compared to the same period in the previous fiscal year. The sales increase was primarily in the Company’s domestic operations due to the rollout of a national specialty tile tool program with the Company’s largest home center customer.

For the sixnine months ended August 31,November 30, 2008, sales decreased by $0.2$6.2 million or less than 1%4% compared to the same period in the previous year. The sales decrease was across all of the Company’s significant operations and was primarily related to declinesthe global economic downturn and, in the Company’s European operationsthird quarter of $1.7 million that were only partially offset by increased sales at the Company’s North American and the favorable impact offiscal 2009, changes in foreign currency exchange rates on the Company’s foreign operations.rates.

For the secondthird quarter of fiscal 2009, gross profit increaseddecreased by $1.4$4.0 million or 8%25% compared to the same period in the previous fiscal year. Gross profit as a percentage of sales increaseddecreased to 28.8%24.1% in the secondthird quarter of fiscal 2009 from 28.3%28.8% in the secondthird quarter of fiscal 2008, primarily due to favorable changes in product mix.

2008. Gross profit for the sixnine months ended August 31,November 30, 2008, increaseddecreased by $0.9$3.1 million or 3%6% compared to the same period in the previous fiscal year. Gross profit as a percentage of sales, increaseddecreased to 29.5%27.9% in the sixnine months ended August 31,November 30, 2008 from 28.7% in the same period of the previous yearyear. This decrease is primarily due to favorable product mix.lower sales volume and to selling price concessions and increased rebates and allowances associated with one of the Company’s home center customers.

For the secondthird quarter of fiscal 2009, total operating expenses increased by $3.0$6.3 million or 24% compared to the secondthird quarter of fiscal 2008, principally due to a $7.9 million non-cash goodwill impairment charge. Total operating expenses for the third quarter of fiscal 2009 excluding the goodwill impairment charge decreased by $1.6 million or 12% compared to the third quarter of fiscal 2008. As a percentage of net sales, operating expenses excluding the impairment charge were 26%25% in both the secondthird quarter of fiscal 2009 and 2008.

For the nine months ended November 30, 2008, total operating expenses increased by $9.0 million or 22% compared to 22%the nine months ended November 30, 2007, principally due to the goodwill impairment charge. For the nine months ended November 30, 2008, operating expenses excluding the goodwill impairment charge increased by $1.1 million or 3% compared to the same period in the corresponding period in fiscal 2008.previous year. As a percentage of sales, operating expenses excluding the impairment charge were 25% for the nine months ended November 30, 2008 compared to 24% for the nine months ended November 30, 2007. This increase is primarily due to additional shipping costs incurred in the second quarter of fiscal 2009 related to the additional sales and incremental shipping costs associated with the rollout of a national specialty tile tool program with one of the Company’s largest home center customer.customers. Additionally, the second quarter of fiscal 2008 included the one-time gain of $0.6 million on the sales of the Company’s Stone Mountain operation.

ForPrincipally as a result of the six months ended August 31, 2008, operating expenses increased by $2.7 million or 10% compared to the same perioddecline in the previous year. As a percentage of sales, operating expenses were 26% forCompany’s market valuation during the six months ended August 31, 2008 compared to 23% for the six months ended August 31, 2007 due primarily to the additional shipping cost incurred in the secondthird quarter of fiscal 2009.2009, the Company reevaluated the carrying value of goodwill. The impairment tests indicated that the carrying amount of the goodwill exceeded fair value in certain of the Company’s operations, and led the Company to conclude that goodwill was impaired. The Company recorded a non-cash impairment charge of $7.9 million to reduce the carrying value of goodwill to its implied fair value. The non-cash charge for impairment was recorded at the Company’s Domestic ($6.5 million), Australia/New Zealand ($1.1 million) and Europe ($0.3 million) segments.

Net incomeloss for the secondthird quarter of fiscal 2009 was $0.8$8.4 million or $0.23$2.48 per diluted share compared to net income of $0.1$0.8 million or $0.02$0.22 per diluted share in the secondthird quarter of fiscal 2008, an increasea decrease of $0.7$9.2 million or $0.21$2.70 per diluted share.

For the sixnine months ended August 31,November 30, 2008, net incomeloss was $2.1$6.3 million or $0.59$1.86 per diluted share compared to net income of $0.9$1.7 million or $0.25$0.47 per diluted share for the sixnine months ended August 31,November 30, 2007, a decrease of $8.0 million or $2.33 per diluted share. The decrease was due principally to the global economic downturn and the $7.9 million non-cash impairment charge partially offset by $1.4 million, non-tax deductible, expense in fiscal 2008 relating to the settlement of the Company’s put warrant obligation.

Critical Accounting Policies and Estimates

Revenue Recognition

Sales are recognized when merchandise is shipped and title has passed to the customer, the selling price is fixed and determinable and collectibilitycollectability of the sales price is reasonably assured. Such revenue is recorded net of estimated sales returns, discounts and allowances. The Company establishes reserves for returns and allowances based on current and historical information and trends. Sales and accounts receivable have been reduced by such amounts.

The Company accounts for upfront consideration given to customers 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 which 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 Company’s market valuation and 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 performs anits annual impairment test on goodwill during the second quarter of each fiscal year using information available at May 31st.

Income Taxes

The Company estimates income tax in each jurisdiction in which it operates. This process involves estimating the Company’s current

tax obligations and its deferred income taxes to reflect the tax consequences in 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.

The Company estimates the liability for unrecognized tax benefits associated with uncertain income tax positions. Any benefit ultimately recognized will reduce the Company’s annual effective tax rate.

Results of Operations

Sales

Net sales for the secondthird quarter of fiscal 2009 were $61.0$48.6 million compared to $57.2$54.6 million for the secondthird quarter of fiscal 2008, an increasea decrease of $3.8$6.0 million or 7%11%.

Net sales at the Company’s domestic operations increaseddecreased by $5.2$2.1 million in the secondthird quarter of fiscal 2009 compared to the secondthird quarter of fiscal 2008. This increase was principallySales increased with the Company’s largest home center customer due to the increased sales penetration of existing products into new stores and the introduction of new products in existing stores, atalthough this increase was partially offset by both decreases in the customer’s inventory of the Company’s largest home center customer as a resultproducts and the effects of the rollout of a national specialty tile tool program with this customer. This increase offset lower salesgeneral economic downturn. Sales to other domestic home center and distributor customers. Salescustomers declined in certainas purchases of the Company’s products were similarly affected by inventory management programs and the general economic downturn. Sales also declined in the Company’s Canadian operation by $0.6 million, European operations by $1.2$1.3 million and Australia/New Zealand operations by $2.0 million principally due to significant weakening of local currencies against the U.S. Dollar and to the general weakening in each of the economy.economies in which they operate. Currency translation gains contributed $0.9$2.7 million to the sales increase,decrease, primarily due to the strengtheningweakening of the Australian Dollar and the Euro compared to the U.S. Dollar.

Net sales for the sixnine months ended August 31,November 30, 2008 were $113.9$162.5 million compared to $114.1$168.7 million for the sixnine months ended August 31,November 30, 2007, a decrease of $0.2$6.2 million or less than 1%4%.

NetThe decrease in net sales for the fiscal year 2009 to date compared to the nine months of fiscal 2008 include a decline in certainthe Company’s domestic operation sales of $1.5 million reflecting the net effect of increased sales to the Company’s largest home center customer due to penetration of existing products into new stores and the introduction of new products in existing stores, offset by the effects of inventory reductions and the weakening of the economy; lower sales to other domestic customers due to changes in distribution policies, inventory reductions and the increasing affects of general economic conditions; and the sale of the Company’s EuropeanO’Tool and Stone Mountain operations declined by $1.7 million in the sixfirst two quarters of the year.

In addition, the Company’s foreign operations experienced the effects of weakening economic circumstances as net sales for the nine months ended August 31,November 30, 2008 compared to the same period in the previous year. This decline was partially offset by increased sales atyear, declined in the Company’s North America operations of $0.8Canadian operation by $0.4 million, European operation by $2.9 million and Australia/New Zealand operation by $1.6 million. Currency translation gains increaseddid not have a significant impact on net sales by $2.7 million, primarily due tofor the strengthening of the Australian Dollar, Canadian Dollar and the Euro compared to the U.S. Dollar.nine months ended November 30, 2008.

SalesNet sales from the Company’s non-North American subsidiaries were 19%20% and 23%24% of total net sales in the secondthird quarter of fiscal 2009 and 2008, respectively. For the sixnine months ended August 31,November 30, 2008 and 2007, net sales from the Company’s non-North American subsidiaries were 21% and 22%23% of total net sales, respectively.

Gross Profit

Gross profit for the three months ended August 31,November 30, 2008 was $17.5$11.7 million compared to $16.2$15.7 million for the three months ended August 31,November 30, 2007, an increasea decrease of $1.4$4.0 million or 8%25%. As a percentage of net sales, gross profit increaseddeclined to 28.8%24.1% in the secondthird quarter of fiscal 2009 from 28.3%28.8% in the secondthird quarter of fiscal 2008.

For the sixnine months ended August 31,November 30, 2008, gross profit was $33.6$45.3 million compared to $32.7$48.4 million for the sixnine months ended August 31,November 30, 2007, an increasea decrease of $0.9$3.1 million or 3%6%. As a percentage of sales, gross profit increaseddeclined to 29.5%27.9% for the first sixnine months of fiscal 2009 from 28.7% for the first sixnine months of fiscal 2008.

The increasedecrease in gross profit in the three and sixnine months ended August 31,November 30, 2008 compared to the same periods in the previous year was primarilypartially attributable to the sales volume increasesdecrease at the Company’s domestic operations, offset somewhat by a decline in gross profit due to non-recurring costsand foreign operations. Additionally, the Company’s domestic operation provided its largest home center customer with additional sales rebates and allowances, and price concessions on certain product lines as part of the award in the Company’s Australia/New Zealand operations. The increase in gross profit asfirst quarter of fiscal 2009 of a percentage of sales during the same period was due to favorable changes in product mix through a greater proportion of sales from higher margin

underlayment andnational specialty tile tool products.program. Foreign currency exchange rate changes contributed $0.3$0.9 million and $0.9$0.1 million to the reduction in additional gross profit for the three and sixnine months ended August 31,November 30, 2008, respectively, primarily due to the strengtheningweakening of the Australian Dollar, Canadian Dollar and the Euro compared to the U.S. Dollar.

Operating Expenses

OperatingTotal operating expenses for the three months ended August 31, 2008 were $15.6 million compared to $13.2 million for the three months ended August 31, 2007, an increase of $2.4 million or 18%. For the six months ended August 31, 2008, operating expenses were $29.3 million compared to $27.1 million for the six months ended August 31, 2007, an increase of 2.2 million or 8%.

Shipping expenses for the secondthird quarter of fiscal 2009 were $7.2$20.1 million compared to $5.7$13.8 million infor the secondthird quarter of fiscal 2008, an increase of $1.5$6.3 million or 27%46%, principally due to a $7.9 million non-cash goodwill impairment charge. For the nine months ended November 30, 2008, operating expenses were $49.2 million compared to $40.2 million for the nine months ended November 30, 2007, an increase of $9.0 million or 22%, principally due to the goodwill impairment charge.

Total shipping, general and administrative, and selling and marketing expenses for the third quarter of fiscal 2009 were $12.3 million compared to $13.9 million for the third quarter of fiscal 2008, a decrease of $1.6 million or 12%. As a percentage of net sales, these

expenses were 25% in both the third quarter of fiscal 2009 and 2008. For the nine months ended November 30, 2008, total shipping, general and administrative, and selling and marketing were $41.5 million compared to $41.1 million for the nine months ended November 30, 2007, an increase of $0.4 million or 1%. As a percentage of sales, these expenses were 25% for the nine months ended November 30, 2008 compared to 24% for the nine months ended November 30, 2007.

Shipping expenses for the third quarter of fiscal 2009 were $5.3 million compared to $5.5 million in the third quarter of fiscal 2008, a decrease of $0.2 million or 4%. For the third quarter of fiscal 2009 and 2008, shipping expenses as a percentage of sales were 11% and 10%, respectively. Shipping expenses for the nine months ended November 30, 2008 were $18.1 million compared to $17.3 million in the same period of the previous year, an increase of $0.8 million or 5%. For the nine months ended November 30, 2008 and 2007, shipping expenses as a percentage of sales were 11% and 10%, respectively. Changes in customer mix, with a larger proportion of sales from higher freight cost customers, has resulted in $0.7 millionthe increase shipping cost as a percentage of the shipping expense increase.sales. Additional freight expense and labor cost of approximately $0.6 million were incurred in the second quarter of fiscal 2009 associated with the rollout of a national specialty tile tool program. The second

General and administrative expenses for the third quarter of fiscal 2009 incremental costs resultedwere $3.8 million compared to $5.0 million in shipping expenses for the sixthird quarter of fiscal 2008, a decrease of $1.2 million or 24%. For the nine months ended August 31,November 30, 2008, ofgeneral and administrative expenses were $12.8 million compared to $11.8$13.8 million in the same period of the previous year, an increasea decrease of $1.0 million or 9%7%. ForThe decrease principally was due to the second quarter of fiscal 2009 and 2008, shipping expenses as a percentagethird quarter reversal of sales were 12% and 10%, respectively. For the six months ended August 31, 2008 and 2007, shipping expenses as a percentage of sales were 11% and 10%, respectively.

General and administrative expenses$0.8 million for the second quarter of fiscal 2009 were $4.6 million compared to $4.1 millionmanagement bonuses accrued in the secondprevious two quarters. Additionally, the third quarter of fiscal 2008 an increase ofincluded $0.5 million or 11%. The increase principally was due to a one-time severance charge of $0.2 million inexpenses associated with the second quarterrestructuring of fiscal 2009 at the Company’s domestic operations and realized currency exchange gains of $0.2 million at the Company’s foreignU.K. operations. For the six months ended August 31, 2008, general and administrative expenses were $9.0 million compared to $8.8 million in the same period of the previous year, an increase of $0.2 million or 3% due to the incremental cost in the second quarter of fiscal 2009. As a percentage of net sales, general and administrative expenses were 8% and 7%9% in the secondthird quarter of fiscal 2009 and 2008, respectively. For the sixnine months ended August 31,November 30, 2008 and 2007, general and administrative expenses were consistent at 8% of sales.

Selling and marketing expenses for the secondthird quarter of fiscal 2009 were $3.8$3.2 million compared to $3.4 million in the second quarter of fiscal 2008, an increasea decrease of $0.4$0.2 million or 10%8%. This increase is duedecrease was related to the reorganization of certain oflower sales volume during the Company’s foreign distribution and sales operations.current quarter. For the sixnine months ended August 31,November 30, 2008, selling and marketing expenses were $7.4$10.6 million compared to $6.5$10.0 million in the same period of the previous year, an increase of $0.9$0.6 million or 13%6%. The reorganization within the Company’s Australia/New Zealand distribution and sales operations resulted in $0.6$0.8 million additional sales expense. In addition, increased expenses for trade shows and other product promotion activities at the Company’s domestic operations resulted in $0.3 million in additional marketing expenses. These increases were partially offset by lower selling and marketing expenses at certain of the Company’s other foreign operations. As a percentage of net sales, selling and marketing expenses were consistent at7% and 6% in the secondthird quarter of fiscal 2009 and 2008.2008, respectively. For the sixnine months ended August 31,November 30, 2008 and 2007, selling and marketing expenses were 7% and 6% of sales, respectively.

Other Income / Expense

During the three and sixnine months ended August 31,November 30, 2008, the Company recorded royalty income of $0.1 million and $0.2$0.3 million respectively. In both periodsFor the nine months ended November 30, 2008, this income was offset by a loss on sale of fixed assets at the Company’s Australian subsidiary of $0.1 million.

For the three and six months ended August 31,November 30, 2007, the Company recorded other income of $0.7$0.2 million related to the Company’s U.K. operation selling certain manufacturing equipment to one of its overseas suppliers. For the nine months ended November 30, 2007, the Company recorded other income of $0.9 million that primarily consisted of the gain on the sale of the Company’s Stone Mountain operation in the second quarter of fiscal 2008.

Impairment Loss on Goodwill and Other Intangibles

Principally as a result of the decline in the Company’s market valuation during the third quarter of fiscal 2009, the Company reevaluated its remaining goodwill for impairment. Earnings forecasts for each of our reporting units that supported the fair value estimates used in the impairment test performed in the second quarter of fiscal 2009 were updated. The updated valuations considered market approaches, the present value of future cash flows and the market valuation of the Company as at November 30, 2008. These tests indicated that the carrying amount of the goodwill exceeded fair value in certain of our operating entities, and led the Company to conclude that goodwill was impaired. The non-cash charge for impairment was recorded at the Company’s Domestic ($6.5 million), Australia/New Zealand ($1.1 million) and Europe ($0.3 million) segments.

After the non-cash charge for impairment, $0.9 million of goodwill remains in the Canada segment. No balance remains in the Domestic, Australia/New Zealand, Europe or Other segments.

The Company will continue to assess the potential of impairment of goodwill in accordance with FASB Statement No. 142 in future periods. Should the Company’s business prospects change, and its expectations for acquired business be further reduced, or other circumstances that affect our business dictate, the Company may be required to recognize additional impairment charges.

Changes in the Put Warrant Liability

In the second quarter of fiscal 2008, the Company paid a cash settlement of its liability under the then outstanding Warrant Agreement between the Company and HillStreet Fund L.P. For the three and sixnine months ended August 31,November 30, 2007, the Company’s expense was $1.4 million related to the change in the fair value of the put warrant liability.

Interest Expense

Interest expense for the three and sixnine months ended August 31,November 30, 2008 was $0.6$0.5 million and $1.0$1.6 million respectively. These amounts compare to $0.6$0.7 million and $1.3$2.0 million for the same periods in the previous fiscal year. Average borrowings in fiscal 2009 have generally increased compared to fiscal 2008, while decreases in average interest rates to date have offset the cost of additional borrowings.

If the Company had been in breach of the financial covenants and, as a result, had been in default under its domestic loan agreement during the three and nine months ended November 30, 2008, interest expense could have increased by approximately $0.3 million and $0.8 million, respectively.

Income Taxes

The Company recorded a benefit for income taxes for the three months ended November 30, 2008, of $0.5 million and a provision for income taxes for the three and sixnine months ended August 31,November 30, 2008 of $0.6 million and $1.4 million, respectively.$0.9 million. This compares with a provision for income taxes of $1.5$0.5 million and $2.6$3.1 million for the same periods in fiscal 2008. The effective tax rate for the three and sixnine months ended August 31,November 30, 2008, was 43%6% and 40%-16%, respectively. The effective tax rate for the three and sixnine months ended August 31,November 30, 2007, was 96%39% and 74%65%, respectively.

The provision for income taxes in the second quarter of fiscal 2009 includes $0.1 million of taxes on foreign deemed dividends and a valuation allowance of $0.2 million on foreign net operating losses, which the Company determined are unlikely to provide a future benefit. The provision for income taxes for the six months ended August 31, 2007, includes $0.4 million of US tax credits and $0.2 million of valuation allowances on foreign net operating losses. In all periods presented, a significant portion of the goodwill impairment charge and the change in the put warrant liability isare non-deductible for tax purposes.

The fiscal 2009 and 2008 provision was based upon the statutory tax rates available in every jurisdiction in which the Company operates as adjusted for expenses reported for financial reporting purposes that are non-deductible for tax purposes and tax contingencies.

Net Income / Loss

As a result of the global economic downturn, the non-cash charge for impairment of goodwill and other matters noted above, principally the settlement of the put warrant obligation in fiscal 2008 and returning toCompany incurred a more normalized effective tax rate, net incomeloss for the secondthird quarter of fiscal 2009 was $0.8of $8.4 million or $0.23$2.48 per diluted share compared with net income of $0.1$0.8 million or $0.02$0.22 per diluted share in the secondthird quarter of fiscal 2008, an increasea decrease of $0.7$9.2 million or $0.21$2.70 per diluted share. For the sixnine months ended August 31,November 30, 2008, the net incomeloss was $2.1$6.3 million or $0.59$1.86 per diluted share compared to net income of $0.9$1.7 million or $0.25$0.47 per diluted share in the same period of fiscal 2008, an increasea decrease of $1.2$8.0 million or $0.34$2.33 per diluted share.

Net loss adjusted for the non-cash charge for impairment, change in the put warrant liability and other non-recurring items was $0.9 million or $0.28 per diluted share for the third quarter of fiscal 2009 compared to net income of $1.1 million or $0.31 per diluted share for the third quarter of fiscal 2008. Net income adjusted in the same manner for the nine months ended November 30, 2008 was $1.1 million or $0.32 per diluted share compared to $3.1 million or $0.85 per diluted share for the nine months ended November 30, 2007.

Non-GAAP Financial Measures - Reconciliation of Net Income (Loss) to Net Income (Loss) Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items and Net Income (Loss) Per Share Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items

Net Income (Loss) Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items and Net Income (Loss) Per Share Adjusted for the Non-Cash Charge for Impairment, 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 (Loss) Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items and Net Income (Loss) Per Share Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items as internal measures of its business. Net Income (Loss) Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items and Net Income (Loss) Per Share Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items are not meant to be considered a substitute or replacement for Net Income (Loss) and Net Income (Loss) Per Share as prepared in accordance with generally accepted accounting principles.

The reconciliation of Net Income (Loss) to Net Income (Loss) Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items and Net Income (Loss) Per Share to Net Income (Loss) Per Share Adjusted for the Non-Cash Charge for Impairment, Change in the Put Warrant Liability and Other Non-Recurring Items is as shown on the following page (in thousands except for per share data):

		For the Three Months Ended November 30,							For the Nine Months Ended November 30,
		2008				2007			2008				2007
Net income (loss), as reported (a)		$	(8,376	)		$	794		$	(6,325	)		$	1,710
Add back (deduct):
Gain on sale of businesses, net of tax			—				—			—				(383	)
Impairment of goodwill, net of tax			7,445				—			7,445				—
Realization accumulated foreign currency translation loss related to the disposition of certain assets and obligations of the foreign subsidiaries			—				323			—				323
Change in put warrant liability			—				—			—				1,439
Net income (loss) adjusted for the non-cash charge for impairment, change in the put warrant liability and other non-recurring items (b)		$	(931	)		$	1,117		$	1,120			$	3,089
Net income (loss) per share, as reported:
Basic ((a)/(c))		$	(2.48	)		$	0.23		$	(1.86	)		$	0.49
Diluted ((a)/(d))		$	(2.48	)		$	0.22		$	(1.86	)		$	0.47
Weighted average number of shares outstanding, as reported:
Basic (c)			3,377				3,430			3,412				3,436
Diluted (d)			3,377				3,567			3,412				3,603
Net income (loss) per share adjusted for the non-cash charge for impairment, change in the put warrant liability and non-recurring items:
Basic ((b)/(e))		$	(0.28	)		$	0.32		$	0.32			$	0.89
Diluted ((b)/(f))		$	(0.28	)		$	0.31		$	0.32			$	0.85
Weighted average number of shares outstanding as adjusted for the non-cash charge for impairment, change in the put warrant liability and non-recurring items:
Basic (e)			3,377				3,430			3,412				3,436
Diluted (f)			3,377				3,567			3,449				3,603

Liquidity and Capital Resources

Working capital was $7.9$2.1 million as of August 31,November 30, 2008, compared to $9.1 million at February 29, 2008, a decrease of $1.2$7.0 million.

Net cash usedGlobal financial markets have recently experienced a significant decline in operating activities during the first six months of fiscal 2009 was $9.5 million compared to net cash provided by operating activities of $2.4 million for the comparable fiscal 2008 period. During the first six months of fiscal 2009, the Company used net cash of $13.0 million associated with the increase in receivables, inventory, trade payablesliquidity and other accrued liabilities principally related to the initial rollout of the national specialty tile tools program, and for the upfront consideration paid related to that program. For the same period in fiscal 2008, increases in inventory and accounts receivable used cash of $4.7 million and increases in trade payables and accrued liabilities provided cash of $2.1 million.

Net cash used in investing activities was less than $0.1 million in the first six months of fiscal 2009. This was comprised of the final

proceeds from the sale of the Company’s O’Tool operation of $0.3 million that was offset by capital expenditures of $0.4 million. Cash provided by investing activities in the first six months of fiscal 2008 was $2.8 million, which was comprised of the initial proceeds from the sales of the Company’s O’Tool operation and proceeds from the sale of the Stone Holding operation of $3.1 million that was partially offset by capital expenditures of $0.3 million.

Net cash provided by financing activities was $9.6 million in the first six months of fiscal 2009 as compared to cash used in financing activities of approximately $4.9 million for the same period in the previous year. During the first six months of fiscal 2009 the Company borrowed an additional $10.2 million on its lines of credit primarily to finance the working capital requirements associated with the rollout of the national specialty tile tools program. During the first six months of fiscal 2009, the Company repaid $1.1 million of long-term debt, borrowed an additional $0.5 million under its existing Canadian mortgage facility and repurchased $0.2 million of its own stock. For the comparable fiscal 2008 period, the Company repaid $1.5 million on its line of credit and $2.4 million of long-term debt, settled the Company’s put warrant obligation of $2.3 million and refinanced $1.4 million of long-term debt associated with its Australian subsidiary.

During the second quarter of fiscal 2009, the Company entered into a 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.availability. The Company has historically relied on internally generated funds the repurchases through the use of existing sources of liquidity, borrowings under the current credit facility or new borrowings. Refer to Item 2. Unregistered Sales of Equity Securitiesfrom operations and Use of Proceeds for a discussion of the shares of common stock repurchased by the Company during the second quarter of fiscal 2009.

The Company uses several bank lines of credit to support the working capital requirements of its various operations. Refer tooperations (see Note E to the notesconsolidated financial statements). As of November 30, 2008, the Company breached certain financial covenants under its domestic loan agreements, and was in default under that facility and, as a result, under certain other international and domestic facilities. On January 22, 2009, the Company entered into a Forbearance Agreement applicable to its domestic loan agreement under which the revolving credit facility was reduced from $35 million to $30 million and the lenders agreed to forbear from exercising any of their default rights and remedies in response to the consolidated financial statements for a discussionoccurrence and continuance of the default through March 16, 2009, subject to the Company’s credit facilities.compliance with certain requirements enumerated in the Forbearance Agreement.

The Company believes thatis dependent upon the continued forbearance of the lenders until such time as the Company is able to improve its existing cash balances, internally generated funds from operationsoperating results and/or amend its credit facilities on acceptable terms. The Company is taking significant actions to reduce expenses and available bank lines of credit will provide the liquidity necessaryadjust our operating plans, including workforce reductions, business restructuring, reduced work schedules for manufacturing and distribution personnel, salary reduction and restoration program applicable to satisfy itsall salaried personnel, reductions in planned expenses, and tighter purchasing, inventory and 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. management.

There can be no assurance however, that the assumptions upon whichfunds will be available to the Company basesto satisfy its future debt obligations and fund 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.requirements. If these assumptions are not correct, the Company maywere required to repay the balances due under its domestic loan agreement or other credit facilities upon the termination of the Forbearance Agreement, the Company would be required to raise additional capital through other loans, or the issuance of debt or equity securities that would requireor the consentsale of the Company’s current lenders.

assets. 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.all, in which case the Company would be unable to repay the balances due under its outstanding credit facilities.

Net cash used in operating activities during the first nine months of fiscal 2009 was $6.6 million compared to net cash provided by operating activities of $3.1 million for the comparable fiscal 2008 period. During the first nine months of fiscal 2009, the Company used net cash of $10.8 million associated with the increase in inventory, principally related to the anticipated incremental business associated with the national specialty tile tools program, and for the upfront consideration paid related to that program. This use of cash was partially offset by the reduction in accounts receivable that provided cash of $1.7 million. For the same period in fiscal 2008, increases in inventory and reduction in trade payables used cash of $4.7 million and the reduction in accounts receivable provided cash of $0.9 million.

Net cash used in investing activities was $0.5 million in the first nine months of fiscal 2009. This was comprised of the final proceeds from the sale of the Company’s O’Tool operation of $0.3 million that was offset by capital expenditures of $0.8 million. Cash provided by investing activities in the first nine months of fiscal 2008 was $1.1 million, which was comprised of the initial proceeds from the sales of the Company’s O’Tool operation, proceeds from the sale of the Stone Mountain operation and proceeds from the sale of equipment of $3.8 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 million.

Net cash provided by financing activities was $7.2 million in the first nine months of fiscal 2009 as compared to cash used in financing activities of $3.7 million for the same period in the previous year. During the first nine months of fiscal 2009 the Company borrowed an additional $8.3 million on its lines of credit primarily to finance the working capital requirements associated with the increase in inventory and for the upfront consideration paid related to the national specialty tile tools program. During the first nine months of fiscal 2009, the Company repaid $1.2 million of long-term debt, borrowed an additional $0.5 million under its existing Canadian mortgage facility and repurchased $0.4 million of its own stock. For the comparable fiscal 2008 period, the Company borrowed $0.5 million on its line of credit and repaid $3.5 million of long-term debt, settled the Company’s put warrant obligation of $2.3 million and refinanced $1.7 million of long-term debt associated with its Australian subsidiary. In addition, as of November 30, 2008, $3.1 million of the non current portion of the Company’s mortgage facilities was reclassified to current liabilities.

During the second quarter of fiscal 2009, the Company entered into a purchase plan under which it purchased the Company’s common stock from time to time on the open market or in privately negotiated transactions. During the third quarter of fiscal 2009, the Company discontinued purchases under the plan. The Company funded the repurchases through the use of borrowings under the current credit facility. Refer to Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for a discussion of the shares of common stock repurchased by the Company during the third quarter of fiscal 2009.

Impact of Inflation and Changing Prices

During fiscal 2008 and continuing into the third quarter of fiscal 2009, the Company has experienced and the Company expects to continue to experience pricecost increases in certain key commodities and in components related to the purchase of raw materials and finished goods. The Company believes that itsCompany’s level of gross profit as a percent of net sales ishas been affected by these increases. Other than the changes described, the effect of inflation on our operations has been reasonably minimal.

Recently Issued Accounting Standards

Refer to Note L to the notes to the consolidated financial statements for a discussion of 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 the 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 those sources to meet the Company’s future working capital needs, anticipated capital expenditures and debt obligations forobligations; the next twelve months;Company’s plans and expectations regarding its ability to comply with the terms of its credit facilities and the Forbearance Agreement; the Company’s expectations and estimates regarding the current global economic environment through fiscal 2010; the Company’s plans relating to cost reduction and cash management measures; the Company’s expectations regarding its assessment of goodwill and other intangible assets; the Company’s ability to successfully executecontinue its growth strategy, including expanding its market share, capitalizing on new customers, cross-selling its products, introducing new and innovative products, expanding existing product lines, and increasing its sales and market penetration; expectations regarding payment of dividends; expectations regarding recently issued accounting standards; the Company’s expectations regarding price increases in certain commodities and components related to the purchase of raw materials and finished goods; the expected impact of the outcome of any legal proceedings in which the Company is involved; the Company’s implementation of various measures to address the identified material weaknesses and to improve the overall effectiveness of internal controls over financial reporting; 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 may repurchase shares of its common stock and the source of funds for stock repurchases; the Company’s expectation regarding the expensing of deferred costs in fiscal 2009; the Company’s expectations regarding its future effective tax rate; the Company’s expectation regarding the total amount of unrecognized tax benefits over the next 12 months; the cost of compliance with Environmental Laws and the Company’s anticipated expenditures on monitoring of wells and other environmental activity for the 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 Item 1A-Risk Factors). Among the risks and uncertainties which could cause such a difference are the assumptions upon which the Company bases its assessments of its future working capital, capital expenditures and capital expenditures;debt obligations; the Company’s ability to comply with the ratios and covenants interms of the Company’s credit facilities;facilities and the Forbearance Agreement; the Company’s ability to amend its credit facilities or obtain continued forbearance on acceptable terms; the Company’s ability to successfully implement cost reduction and cash management measures; the Company’s ability to satisfy its debt obligations, working capital needs and to finance its anticipated capital expenditures; the Company’s dependence upon a limited number of customers for a substantial portion of its sales and the continued success of initiatives with those customers; the state of the housing, residential and commercial construction and home improvement markets; the state of the credit and financial markets; the success of the 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; the Company’s ability to maintain and improve its brands; the Company’s reliance upon certain major foreign suppliers; the impact of fluctuations in foreign currencies; the Company’s reliance upon suppliers and sales agents for the purchase of finished products which are then resold by it; the level of demand for the Company’s products among existing and potential new customers; the Company’s ability to successfully integrate its acquired businesses; the Company’s dependence upon the efforts of Mr. Lewis Gould, the Company’s Chief Executive Officer and certain other key personnel; the Company’s ability to successfully integrate new management personnel into the Company; the Company’s ability to successfully implement measures to address the identified material weaknesses; the Company’s ability to accurately predict the number and type of employees required to conduct its operations and the compensation required to be paid to such personnel; the Company’s ability to manage its growth, and the risk of economic and market factors affecting the Company or its 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 on the Company; the Company’s belief that there will be no future adverse effecteffects on the fair value of the Company’s deferred income taxes, deferred costs, 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 filed by the Company with the Securities and Exchange Commission.

All forward looking statements included herein are made only as of the date such statements are made and the 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 the Company hereafter becomes aware. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its 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.

Not required.

Evaluation of Disclosure Controls and Procedures

For the quarter ended August 31,November 30, 2008, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including Lewis Gould, the Company’s Chief Executive Officer, and Richard Brooke, the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15(e). The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Based upon the Company’s evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that as a result of the material weaknesses in the Company’s internal control over financial reporting described more fully below, the Company’s disclosure controls and procedures were not effective as of August 31,November 30, 2008.

Internal Control Material Weaknesses and Remediation Steps

As disclosed in the Company’s Form 10-K for 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 effectiveness of its internal control over financial reporting. The following steps are the Company’s planned measures to remediate the conditions leading to the above stated material weaknesses:

Changes in Internal Control over Financial Reporting

DuringThere were no changes during the quarter ended August 31,November 30, 2008 as part ofin the Company’s remedial measures discussed above relatinginternal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s foreign operations, the Company initiated the use of a recurring operation and finance report, and a quarterlyregistrant’s internal control over financial close disclosure checklist. In addition, during the quarter the Company performed an on-site review of financial accounting at its Australian subsidiary.reporting.

PART II. OTHER INFORMATION

OnExcept as set forth below, there have been no material developments in the legal proceedings described in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008 or as updated in the Company’s quarterly reports on Form 10-Q filed on July 15, 2008 and 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 from15, 2008.

The suit against 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 manufacturedhas been dismissed without any payment 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 existsit is unknown at this time whether it will seek indemnification for the Company to opine on the merits, if any,fees incurred in its defense. For a full description of the claim for indemnity orparties and basis of the underlying claims.litigation please refer to Note K – Contingencies.

The Company is involved in litigation from time to time in the regular 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, its operations and performance are subject to risks. While the Company believes that its expectations are reasonable, they are not guaranteesItem 1A of future performance. The Company’s results could differ substantially from its expectations if anyPart I of the events described in these risks disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008 occur.includes a detailed discussion of the risk factors that could materially affect the Company’s business, financial condition, results of operations or future prospects. Set forth below is a discussion of the material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K. The information below updates, and should be read in conjunction with, the risk factors in the Company’s Annual Report on Form 10-K. The Company encourages you to read these risk factors in their entirety.

If the Company is unable to obtain continued forbearance with respect to defaults under the Company’s credit facilities, the Company may be unable to satisfy its liquidity requirements and continue its operations as a going concern.

The Company finances its operations primarily through cash generated by its operating activities and through borrowings under various credit facilities. On January 7, 2009, in connection with its preparation of the 2009 third fiscal quarter financial statements, the Company determined that it had breached two covenants under its domestic credit facility, the senior debt to trailing EBITDA ratio and the fixed charge coverage ratio. As a result, the Company is in default under that credit facility and under certain other international and domestic facilities, which gives the lenders the right to prohibit additional borrowing under the facilities, accelerate the Company’s indebtedness under the facilities, and take other actions as provided for in each of the credit facilities.

On January 22, 2009, the Company entered into a Forbearance Agreement applicable to the Company’s domestic credit facility and its Canadian mortgage facility. Pursuant to the terms of the Forbearance Agreement, commencing on the date of the Forbearance Agreement and ending on March 16, 2009, the lenders agreed to forbear from exercising any of their default rights and remedies in response to the occurrence and continuance of the default, subject to the Company’s compliance with certain requirements enumerated in the Forbearance Agreement.

There can be no assurance that the Company will be in compliance with the terms of its credit facilities upon the termination of the Forbearance Agreement, or able to either amend its credit facilities or obtain continued forbearance on terms acceptable to the Company, or at all. If the lenders elect to pursue their remedies under one or more of the credit facilities, including limiting or terminating the Company’s right to borrow, the Company may be unable to obtain the capital it needs to continue its operations as a going concern.

The current weakness and any further deterioration of the global economic environment could negatively impact the Company’s business, working capital, liquidity, access to the credit markets and business prospects.

The current substantial weakness in the global economic environment and the credit and financial markets could negatively impact the Company’s business in several ways. For instance, falling home prices, increases in foreclosure rates, increases in unemployment rates, significant declines in the equity markets, a tightening of credit availability, and concerns about the general health of the global economy have led to a significant decline in consumer confidence and consumer discretionary spending, which has caused and may continue to cause consumers to delay undertaking or determine not to undertake new home improvement projects, cause a decline in customer transactions overall, cause the Company’s customers to delay purchasing or determining not to purchase Company products, or cause the Company’s customers to implement inventory management programs and consequently adversely affect the Company’s financial performance.

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

The Company is substantially dependent on two of its customers, Home Depot and Lowe’s, for a large percentage of its revenues. These two customers accounted for approximately 61% and 57% of the Company’s total net sales in fiscal 2008 and fiscal 2007, respectively. The Company expects that it will continue to rely upon these customers for a significant portion of its revenues. Either customer may significantly reduce its orders for the Company’s products for a number of reasons, including changes in demand for the Company’s products, implementation of inventory management programs, delays or changes in scheduled product introductions, or changes in store upgrade or expansion plans. Should this happen, the Company’s revenue could be temporarily or permanently affected, which could materially and adversely affect the Company’s business, including but not limited to exposing the Company to excess inventory levels. Any significant and continuing reduction in business with Home Depot or Lowe’s would have a material adverse effect on the financial position, results of operations and liquidity of the Company.

Risks associated with foreign currency exchange fluctuations related to the Company’s financial reporting of its international operations and to its buying in currencies other than the local currencies in which it operates could adversely affect the Company’s business, financial position and results of operations.

The Company is exposed to foreign currency risks resulting from changes in currency exchange rates because of its international operations and its dependence on Asian suppliers. The deterioration in the global economic environment has resulted in significant volatility in the global currency markets. Most recently, the volatility has resulted in a substantial strengthening of the U.S. dollar against the Canadian, European and Australian currencies. A relatively stronger U.S. dollar means that the revenues, profits and losses of our international operations will translate into lower U.S. dollar amounts. Moreover, the general strengthening of the Chinese Renminbi and inflationary pressures in China during the year put increased pressures on pricing from major suppliers. The Company does not use forward contracts or other derivative instruments to mitigate the risks associated with fluctuating exchange rates. 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.

Volatility in currency exchange rates has affected and may continue to affect the Company’s financial results. The Company records foreign currency translation adjustments as other comprehensive income. For the three and nine months ended November 30, 2008 comprehensive loss resulting from foreign currency translation adjustments were $2.5 million and $3.8 million, respectively. For the three and nine months ended November 30, 2007 comprehensive income resulting from foreign currency translation adjustments was $1.9 million and $1.7 million, respectively. Further fluctuations in currency exchange rates could adversely affect the Company’s results of operations in future periods.

The Company could be required to record a significant charge to earnings if it determines that its deferred income taxes, deferred costs, goodwill or other intangible assets become impaired.

During the third quarter of fiscal 2009, the Company determined that goodwill related to certain of the Company’s reporting units was impaired and recorded a non-cash charge of $7.9 million for the impairment. Future significant declines in the Company’s market capitalization or expected cash flows, or other significant adverse changes in the business climate could result in further goodwill impairment or in the impairment of deferred income taxes, deferred costs or other intangible assets. A future write down of its deferred income taxes, deferred costs, goodwill or other intangible assets could result in material non-cash charges that are adverse to our operating results and financial position.

There have been no other material changes to the Company’sin our risk factors from those disclosed in the Company’sour Form 10-K for the fiscal year ended February 29, 2008.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Beginning in fiscal 1999, the Company has from time to time repurchased shares of its outstanding Common Stock from Ms. Susan Gould, Corporate Secretary, pursuant to a Board resolution. Ms. Gould is not obligated to sell any shares of Common Stock to the Company. As of August 31,November 30, 2008, Ms. Gould has sold a total of 138,038 shares to the Company under this resolution.

During the second quarter of fiscal 2009, the Company repurchased 12,000 shares from Ms. Gould for approximately $0.1 million under this resolution.

During the second quarter of fiscal 2009, the Company repurchased 14,33756,778 shares of Common Stock, including 10,000 shares in a privately negotiated transaction with Ms. Susan Gould, at an aggregate cost of approximately $0.1$0.3 million under the Company’s previously announced purchase plan pursuant to which the Company may purchase up to $2.0 million of its Common Stock from time to time on the open market or in privately negotiated transactions. During the third quarter of fiscal 2009, the Company repurchased 42,441 shares of its common stock under its plan.

The Annual MeetingOn January 22, 2009, the Company entered into a Forbearance Agreement with Bank of Stockholders was held on August 8, 2008. The following matters were voted upon atAmerica, N.A. and HSBC Bank USA, National Association (the “Lenders”) and Bank of America, N.A., as agent for the Annual Meeting:

(i) The election of the following five membersLenders applicable to the Company’s Boarddomestic credit facility and its Canadian mortgage facility. Under the Forbearance Agreement, the Lenders agreed to forbear from exercising any of Directors:their default rights and remedies in response to the occurrence of the breach of certain financial covenants, previously disclosed in the Form 8-K filed on January 13, 2009, and the continuance of the default through March 16, 2009, subject to the Company’s compliance with certain requirements enumerated in the Forbearance Agreement.

Additionally, pursuant to the terms of the Forbearance Agreement which ends on March 16, 2009, the borrowing available under the revolving credit facility was reduced from $35 million to $30 million, and a default interest rate of Libor plus 4.50% became effective. The foregoing summary is qualified in its entirety by reference to the Forbearance Agreement which is attached as an exhibit to this Form 10-Q.

(ii) The ratification of the appointment of Grant Thornton LLP as the Company’s independent certified public accountants for the fiscal year ending February 28, 2009.

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

2632