UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended August 31, 2007 ,

or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                      .

Commission File No. 1-14187

RPM International Inc.

(Exact name of Registrant as specified in its charter)

DELAWARE		02-0642224
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO		44258
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code		(330) 273-5090

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 þ       No o .

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o .

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ .

As of October 3, 2007
121,400,027 Shares of RPM International Inc. Common Stock were outstanding.

 

 

RPM INTERNATIONAL INC. AND SUBSIDIARIES*

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			31
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			34
Item 5. Other Information			34
Item 6. Exhibits			35
Signatures			36
EX-3.1
EX-10.1
EX-11.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

		Three Months Ended
		August 31,
		2007				2006
Net Sales		$	930,339			$	844,161
Cost of Sales			546,437				499,088
Gross Profit			383,902				345,073
Selling, General and Administrative Expenses			271,035				237,585
Interest Expense, Net			12,718				13,203
Income Before Income Taxes			100,149				94,285
Provision for Income Taxes			31,881				32,943
Net Income		$	68,268			$	61,342
Average Number of Shares of Common Stock Outstanding:
Basic			119,677				117,467
Diluted			130,026				128,192
Basic earnings per share of common stock		$	0.57			$	0.52
Diluted earnings per share of common stock		$	0.53			$	0.49
Cash dividends per share of common stock		$	0.175			$	0.160

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

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

		Three Months Ended
		August 31,
		2007				2006
Cash Flows From Operating Activities:
Net income		$	68,268			$	61,342
Depreciation and amortization			20,878				19,173
Items not affecting cash and other			(1,112	)			2,379
Changes in operating working capital			(76,408	)			(49,320	)
Changes in asbestos-related liabilities, net of tax			(14,657	)			(10,523	)
			(3,031	)			23,051
Cash Flows From Investing Activities:
Capital expenditures			(5,514	)			(11,246	)
Acquisition of businesses, net of cash acquired			(3,387	)			(39,270	)
Purchases of marketable securities			(26,129	)			(18,214	)
Proceeds from the sale of marketable securities			25,667				10,996
Other			374				286
			(8,989	)			(57,448	)
Cash Flows From Financing Activities:
Additions to long-term and short-term debt			34,695				93,372
Reductions of long-term and short-term debt			(830	)			(41,234	)
Cash dividends			(21,170	)			(18,999	)
Exercise of stock options			2,419				965
Repurchase of stock			(3,474	)
			11,640				34,104
Effect of Exchange Rate Changes on Cash and Short-Term Investments			1,207				(353	)
Increase (Decrease) in Cash and Short-Term Investments			827				(646	)
Cash and Short-Term Investments at Beginning of Period			159,016				108,616
Cash and Short-Term Investments at End of Period		$	159,843			$	107,970

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

RPM INTERNATIONAL INC. AND SUBSIDIARIES

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The effective date of FIN 48 is for fiscal years beginning after December 15, 2006. We adopted this interpretation as of June 1, 2007. See
Note I.

NOTE F – CONTINGENCIES AND LOSS RESERVES

Certain of our wholly-owned subsidiaries, principally Bondex International, Inc. (collectively referred to as the subsidiaries), are defendants in various asbestos-related bodily injury lawsuits filed in various

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

state courts with the vast majority of current claims pending in five states – Illinois, Ohio, Mississippi, Texas and Florida. These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposures to asbestos-containing products previously manufactured by our subsidiaries or others.

As of August 31, 2007, our subsidiaries had a total of 10,957 active asbestos cases compared to a total of 10,934 cases as of August 31, 2006. For the quarter ended August 31, 2007, our subsidiaries secured dismissals and/or settlements of 365 claims and made total payments of $22.8 million, which included defense costs paid during the current quarter of $8.8 million. For the comparable period ended August 31, 2006, dismissals and/or settlements covered 232 claims and total payments were $16.4 million, which included defense costs paid during the quarter of $6.6 million. During the quarter, the Company resolved a higher number of claims versus the prior period which accounted for the increase in year-over-year settlement costs. The Company also had higher year-over-year defense costs as a result of implementing various changes to the structure of its defense counsel and in its claims intake and database management facility. To facilitate these and related changes, the Company has necessarily incurred some duplicate costs and in some instances accelerated the payment of certain previously incurred expenses. In this regard, the Company estimates that it spent approximately $3.0 million more than its normal level of defense-related expenditures due to these added transitional expenses. The Company expects similarly high cash outlays, for the same reasons, over the next two quarters as it completes these various defense-related initiatives. Excluding defense costs, the average costs to resolve a claim, including dismissed claims, were $38,356 and $42,241 for each of the quarters ended August 31, 2007 and 2006, respectively. The amount and timing of dismissals and settlements can fluctuate significantly from period to period resulting in volatility in the average costs to resolve claims in any given quarter or year. In addition, in some jurisdictions, cases may involve more than one individual claimant. As a result, settlement or dismissal statistics on a per case basis are not necessarily reflective of the payment amounts on a per claimant basis and the amounts and rates can vary widely depending on a variety of factors including the mix of malignancy and non-malignancy claims and the amount of defense costs incurred during the period.

Estimating the future cost of asbestos-related contingent liabilities was and continues to be subject to many uncertainties, including (i) the ultimate number of claims filed; (ii) the cost of resolving both current known and future unknown claims; (iii) the amount of insurance, if any, available to cover such claims, including the outcome of coverage litigation against the subsidiaries’ third party insurers; (iv) future earnings and cash flow of our subsidiaries; (v) the impact of bankruptcies of other companies whose share of liability may be imposed on our subsidiaries under certain state liability laws; (vi) the unpredictable aspects of the litigation process including a changing trial docket and the jurisdictions in which trials are scheduled; (vii) the outcome of any such trials including judgments or jury verdicts, as a result of our more aggressive defense posture which includes taking selective cases to verdict; (viii) the lack of specific information in many cases concerning exposure to the subsidiaries’ products and the claimants’ diseases; (ix) potential changes in applicable federal and/or state law; and (x) the potential impact of various proposed structured settlement transactions or subsidiary bankruptcies by other companies, some of which are the subject of federal appellate court review, the outcome of which could materially affect any future asbestos-related liability estimates.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

In fiscal 2006, we retained Crawford & Winiarski (“C&W”), an independent, third-party consulting firm with expertise in the area of asbestos valuation work, to assist us in calculating an estimate of our liability for unasserted potential future asbestos-related claims. The methodology used by C&W to project our liability for unasserted potential future asbestos-related claims included C&W doing an analysis of (a) widely accepted forecast of the population likely to have been exposed to asbestos; (b) epidemiological studies estimating the number of people likely to develop asbestos-related diseases; (c) historical rate at which mesothelioma incidences resulted in the payment of claims by us; (d) historical settlement averages to value the projected number of future compensable mesothelioma claims; (e) historical ratio of mesothelioma related indemnity payments to non-mesothelioma indemnity payments; and (f) historical defense costs and their relationship with total indemnity payments.

As a result, at the end of fiscal 2006, we recorded a liability for asbestos claims in the amount of $335.0 million, while paying out $12.9 million for dismissals and/or settlements resulting in our reserve moving from $99.2 million at February 28, 2006 to $421.3 million at May 31, 2006. This reserve increase was based upon C&W’s analysis of our total estimated liability for pending and unasserted potential future claims through May 31, 2016. This amount was calculated on a pre-tax basis and was not discounted for the time value of money. In light of the uncertainties inherent in making long-term projections, we have determined that a ten-year period is the most reasonable time period over which reasonably accurate estimates might still be made for projecting asbestos liabilities and defense costs and, accordingly, the reserve does not include asbestos liabilities for any period beyond ten years. As of August 31, 2007, total reserves were approximately $331.4 million, of which $235.5 million was reserved for unasserted potential future claims and $95.9 million was reserved for pending known claims. The material components of the accruals are: (i) the gross number of open malignancy claims (principally mesothelioma claims) as these claims have the most significant impact on our asbestos settlement costs; (ii) historical and current settlement costs and dismissal rates by various categories; (iii) analysis of the jurisdiction and governing law of the states in which these claims are pending; (iv) outside defense counsel’s opinions and recommendations with respect to the merits of such claims; and (v) analysis of projected liability for unasserted potential future claims.

In determining the amount of our asbestos reserves, we relied on assumptions that are based on currently known facts and projection models. Our actual expenses could be significantly higher or lower than those recorded if assumptions used in our calculations vary significantly from actual results. Key variables in these assumptions include the period of exposure to asbestos claims, the number and type of new claims to be filed each year, the rate at which mesothelioma incidences result in compensable claims against us, the average cost of disposing of each such new claim, the dismissal rates each year and the related annual defense costs. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projections period lengthens. A significant upward or downward trend in the number of claims filed, depending on the nature of the alleged injury, the jurisdiction where filed, the average cost of resolving each such claim and the quality of the product identification, could change our estimated liability, as could any substantial adverse verdict at trial. A federal legislative solution, further state tort reform or structured settlement transaction could also change the estimated liability.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

Subject to the foregoing variables, based on currently available data, we believe that our current asbestos reserves are sufficient to cover asbestos-related cash flow requirements for our known pending and unasserted potential future asbestos-related claims. However, given the uncertainties associated with projecting matters into the future and numerous other factors outside of our control, we believe that it is reasonably possible we may incur asbestos liabilities for the period through 2017 and beyond in excess of our projection. Due to the uncertainty inherent in the loss reserve estimation process, we are unable to estimate an additional range of loss in excess of our accruals. While it is reasonably possible that such excess liabilities could be material to operating results in any given quarter or year, we do not believe that it is reasonably possible that such excess liabilities would have a material adverse effect on our long-term results of operations, liquidity or consolidated financial position.

During fiscal 2004, our third-party insurers’ claimed exhaustion of coverage. Certain of our subsidiaries have filed a complaint for declaratory judgment, breach of contract and bad faith against these third-party insurers, challenging their assertion that their policies covering asbestos-related claims have been exhausted. The coverage litigation involves, among other matters, insurance coverage for claims arising out of alleged exposure to asbestos containing products manufactured by the previous owner of the Bondex tradename before March 1, 1966. On March 1, 1966, Republic Powdered Metals Inc. (as it was known then), purchased the assets and assumed the liabilities of the previous owner of the Bondex tradename. That previous owner subsequently dissolved and was never a subsidiary of Republic Powdered Metals, Bondex, RPM, Inc. or the Company. Because of the earlier assumption of liabilities, however, Bondex has historically and must continue to respond to lawsuits alleging exposure to these asbestos containing products. We discovered that the defendant insurance companies in the coverage litigation had wrongfully used cases alleging exposure to these pre-1966 products to erode their aggregate limits. This conduct, apparently known by the insurance industry based on discovery conducted to date, was in breach of the insurers’ policy language. Two of the defendant insurers have filed counterclaims seeking to recoup certain monies should the plaintiffs prevail on their claims. The parties have substantially completed all fact and expert discovery relating to the liability phase of the case. The parties have filed dispositive motions (including motions for summary judgment) and related briefs. It is difficult to predict when any such motions will be decided by the court or when the court will set a definitive trial date, although our subsidiaries anticipate a ruling on these pending motions during the 2008 fiscal year.

During last year’s second fiscal quarter ended November 30, 2006, Bondex reached a cash settlement of $15.0 million, the terms of which are confidential by agreement of the parties, with one of the defendant insurers. The settling defendant has been dismissed from the case. Our subsidiaries are aggressively pursuing their claims against the remaining insurers based on the terms of their respective policies.

We are unable at the present time to predict the timing or ultimate outcome of this insurance coverage litigation or whether there will be any further settlements. Consequently, we are unable to predict whether, or to what extent, any additional insurance may be available to cover a portion of our subsidiaries’ asbestos liabilities. We have not included any potential benefits from this litigation in calculating our current asbestos reserve. Our wholly-owned captive insurance companies have not provided any insurance or reinsurance coverage for any of our subsidiaries’ asbestos-related claims.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

The following table illustrates the movement of current and long-term asbestos-related liabilities through August 31, 2007:

Asbestos Liability Movement

(Current and Long-Term)

		Balance at								Deductions				Balance
		Beginning				Additions to				(Primarily				at End of
(In thousands)		of Period				Asbestos Charge				Claims Paid)				Period
Quarter Ended August 31, 2007		$	354,268							$	22,823			$	331,445
Year Ended May 31, 2007			421,285								67,017				354,268
Year Ended May 31, 2006			101,172			$	380,000				59,887				421,285

We provide, through our wholly-owned insurance subsidiaries, certain insurance coverage, primarily product liability, to our other subsidiaries. Excess coverage is provided by third party insurers. Our reserves provide for these potential losses as well as other uninsured claims. As of August 31, 2007, the current portion of these reserves amounted to $53.9 million as compared with $55.1 million at May 31, 2007, and $50.0 million at August 31, 2006; while the total long-term reserves of $8.4 million at August 31, 2007 compare with $8.8 million at May 31, 2007 and $13.2 million at August 31, 2006. Product warranty expense is recorded within selling, general and administrative expense. The changes in the reserve balance have occurred primarily as a result of our continuing evaluation of our liability under a class action lawsuit settlement covering our Dryvit residential exterior insulated finish systems product line (“EIFS”). We also offer a warranty program for our roofing systems and have established a product warranty reserve. We review this reserve for adequacy on a quarterly basis and adjust it as necessary. The primary factors that could affect this reserve may include changes in the historical system performance rate as well as the costs of replacement.

Third party excess insurers have historically paid varying shares of Dryvit’s defense and settlement costs for individual commercial and residential EIFS lawsuits under various cost-sharing agreements. Dryvit has assumed a greater share of the costs associated with its EIFS litigation as it seeks funding commitments from our third party excess insurers and will likely continue to do so pending the outcome of coverage litigation involving these same third-party insurers. One of our excess insurers filed suit seeking a declaration with respect to its rights and obligations for EIFS related claims under its applicable policies. During the third quarter of fiscal 2006, the court granted Dryvit’s motion to stay or dismiss the federal filing based on a more complete state court complaint filed against these same insurers and the Company’s insurance broker. The coverage case is now proceeding in state court. Discovery in this litigation is ongoing. The trial is scheduled for June 16, 2008. One insurer appealed the trial court’s order granting Dryvit certain discovery of allegedly privileged claim file documents, and the court of appeals dismissed the appeal on September 12, 2007. However, the insurer has filed a

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

motion for reconsideration, which may result in a continuance of the trial date when the case is returned to the trial court.

In addition, like others in similar businesses, we are involved in several proceedings relating to environmental matters. It is our policy to accrue remediation costs when it is probable that such efforts will be required and the related costs can be reasonably estimated. These liabilities are undiscounted. Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience.

NOTE H – PENSION AND POSTRETIREMENT HEALTH CARE BENEFITS

We account for our pension plans and postretirement benefit plans in accordance with the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” We offer defined benefit pension plans, defined contribution pension plans, as well as several unfunded health care benefit plans primarily for certain of our retired employees. The following tables provide the retirement-related benefit plans’ impact on income before income taxes for the three month periods ended August 31, 2007 and 2006:

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

We previously disclosed in our financial statements for the fiscal year ended May 31, 2007 that we expected to contribute approximately $10.3 million to the Retirement Plans in the U.S. and approximately $8.7 million to plans outside the U.S. during the current fiscal year. As of August 31, 2007, we do not anticipate any changes to these contribution levels.

We have determined that our postretirement medical plan provides prescription drug benefits that will qualify for the federal subsidy provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). For all groups of retirees, we have assumed that the subsidy will continue indefinitely.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This statement requires an employer to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. This statement also requires employers to measure plan assets and obligations at their year-end balance sheet date. We adopted the funded status provisions of SFAS No. 158 in our consolidated balance sheets as of May 31, 2007. We have decided to adopt the requirement to use a May 31 measurement date for defined benefit plan measurement beginning in fiscal 2008, with the exception of certain newly-added plans associated with acquisitions completed during fiscal 2007, for which we had elected to apply a May 31 measurement date as of the date of acquisition. The transition from a measurement date as of February 28 to May 31 beginning in 2008 required us to reduce our consolidated Retained Earnings as of June 1, 2007 by $3.3 million to recognize the one-time after-tax effect of an additional three months of net periodic benefit expense for our retirement and postretirement benefit plans. The balance sheet adjustments as of June 1, 2007 were as follows:

NOTE I – INCOME TAXES

Income Tax Rate

The effective income tax expense rate was 31.8 percent for the three months ended August 31, 2007 compared to an effective income tax expense rate of 34.9 percent for the three months ended August 31, 2006.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

For the three months ended August 31, 2007 and, to a lesser extent for the three months ended August 31, 2006, the effective tax rate differed from the federal statutory rate due to decreases in the effective tax rate principally as a result of certain tax credits and by the U.S. tax impact of foreign operations. Furthermore, during the three months ended August 31, 2007, a decrease in the effective income tax expense rate resulted from incremental U.S. tax benefits associated with the domestic manufacturing deduction and lower tax rates on non-U.S. earnings. The decreases in the effective tax rate were partially offset by valuation allowances associated with losses incurred by certain of our foreign businesses, state and local income taxes and other non-deductible business operating expenses. Additionally, during the three months ended August 31, 2006, the decrease in the effective tax rate was further offset by valuation allowances related to U.S. federal foreign tax credit carryforwards.

Adoption of FIN 48

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48, which clarifies the accounting for uncertainty, if any, in income taxes as recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” represents a significant change in the accounting and reporting of income taxes.

FIN 48 prescribes the accounting for uncertainty in income taxes by providing guidance on the recognition threshold and measurement of a position taken in a tax return or a position expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The effective date of FIN 48 is for fiscal years beginning after December 15, 2006. We adopted this interpretation as of June 1, 2007.

The cumulative effects of applying this interpretation have been recorded as a decrease of $1.7 million to retained earnings. Our unrecognized tax benefits upon adoption were $2.8 million of which $1.9 million would affect the effective tax rate, if recognized.

In conjunction with the adoption of FIN 48, uncertain tax positions have been classified as Other Accrued Income Taxes, non-current unless expected to be paid in one year. We recognize interest and penalties related to unrecognized tax benefits in income tax expense, consistent with the accounting method used prior to adopting FIN 48. At June 1, 2007 the accrual for interest and penalties totaled $1.3 million.

We file income tax returns in the U.S. and various state, local and foreign jurisdictions. As of June 1, 2007, we are subject to U.S. federal income tax examinations for the fiscal years 2004 through 2007. In addition, with limited exceptions, we are subject to various state and local or non-U.S. income tax examinations by tax authorities for the fiscal years 2002 through 2007. We do not anticipate any significant changes to the total unrecognized tax benefits within the next 12 months.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

NOTE J – SEGMENT INFORMATION

We operate a portfolio of businesses and product lines that manufacture and sell a variety of specialty paints, protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by organizing our businesses and product lines into two reportable operating segments, the consumer segments and the industrial segment. Within each reportable operating segment, individual groups of companies and product lines generally address common markets, utilize similar technologies, and can share manufacturing or distribution capabilities.

Our industrial segment products are sold throughout North America and also account for the majority of our international sales. Our industrial product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers.

Our consumer segment manufactures and markets professional use and do-it-yourself (“DIY”) products for a variety of mainly consumer applications, including home improvement, automotive maintenance and boat repair, and personal leisure activities. Our consumer segment’s major manufacturing and distribution operations are located primarily in North America. Consumer segment products are sold throughout North America directly to mass merchants, home improvement centers, hardware stores, paint stores, automotive supply stores, craft shops and to other smaller customers through distributors.

In addition to two reportable operating segments, there are certain business activities, referred to as corporate/other, that do not constitute an operating segment, including corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on the sales of certain assets and other expenses not directly associated with either reportable operating segment. Related assets consist primarily of investments, prepaid expenses, deferred pension assets, and headquarters property and equipment. These corporate and other expenses reconcile reportable operating segment data to total consolidated net sales, income before income taxes and identifiable assets. Comparative three month results on this basis are illustrated in the following table.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2007
(Unaudited)

		Three Months Ended
		August 31,
(In thousands)		2007				2006
Net Sales
Industrial Segment		$	607,953			$	545,254
Consumer Segment			322,386				298,907
Consolidated		$	930,339			$	844,161
Income (Loss) Before Income Taxes
Industrial Segment		$	79,574			$	73,934
Consumer Segment			42,929				41,358
Corporate/Other			(22,354	)			(21,007	)
Consolidated		$	100,149			$	94,285
		August 31, 2007				May 31, 2007
Identifiable Assets
Industrial Segment		$	1,736,270				1,708,606
Consumer Segment			1,231,447				1,285,180
Corporate/Other			330,103				339,363
Consolidated		$	3,297,820				3,333,149

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements include the accounts of RPM International Inc. and its majority-owned subsidiaries. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to our asbestos liability; allowances for doubtful accounts; inventories; allowances for recoverable taxes; useful lives of property, plant and equipment; goodwill; environmental and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience, our most recent facts, and other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of our assets and liabilities. Actual results, which are shaped by actual market conditions, including legal settlements, may differ from our estimates.

We have identified below the accounting policies that are critical to our financial statements.

Revenue Recognition

Revenues are recognized when realized or realizable, and when earned. In general, this is when title and risk of loss pass to the customer. Further, revenues are realizable when we have persuasive evidence of a sales arrangement, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured. We reduce our revenues for estimated customer returns and allowances, certain rebates, sales incentives and promotions in the same period the related sales are recorded.

We also record revenues generated under long-term construction-type contracts, mainly in connection with the installation of specialized roofing and flooring systems, and related services. In general, we account for long-term construction-type contracts under the percentage-of-completion method, and therefore record contract revenues and related costs as our contracts progress. This method recognizes the economic results of contract performance on a timelier basis than does the completed-contract method; however, application of this method requires reasonably dependable estimates of progress toward completion, as well as other dependable estimates. When reasonably dependable estimates cannot be made, or if other factors make estimates doubtful, the completed-contract method is applied. Under the completed-contract method, billings and costs are accumulated on the balance sheet as the contract progresses, but no revenue is recognized until the contract is complete or substantially complete.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

Translation of Foreign Currency Financial Statements and Foreign Currency Transactions

Our reporting currency is the U.S. dollar. However, the functional currency of all of our foreign subsidiaries is their local currency. We translate the amounts included in our consolidated statements of income from our foreign subsidiaries into U.S. dollars at weighted average exchange rates, which we believe are fairly representative of the actual exchange rates on the dates of the transactions. Our foreign subsidiaries’ assets and liabilities are translated into U.S. dollars from local currency at the actual exchange rates as of the end of each reporting date, and we record the resulting foreign exchange translation adjustments in our consolidated balance sheets as a component of accumulated other comprehensive income (loss). Translation adjustments will be included in net earnings in the event of a sale or liquidation of any of our underlying foreign investments, or in the event that we distribute the accumulated earnings of consolidated foreign subsidiaries. If we determined that the functional currency of any of our foreign subsidiaries should be the U.S. dollar, our financial statements would be affected. Should this occur, we would adjust our reporting to appropriately account for such change(s).

As appropriate, we use permanently invested intercompany loans as a source of capital to reduce exposure to foreign currency fluctuations at our foreign subsidiaries. These loans are treated as analogous to equity for accounting purposes. Therefore, foreign exchange gains or losses on these intercompany loans are recorded in accumulated other comprehensive income (loss). If we were to determine that the functional currency of any of our subsidiaries should be the U.S. dollar, we would no longer record foreign exchange gains or losses on such intercompany loans.

Goodwill

We apply the provisions of SFAS No. 141, “Business Combinations,” which addresses the initial recognition and measurement of goodwill and intangible assets acquired in a business combination. We also apply the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill be tested on an annual basis, or more frequently as impairment indicators arise. We have elected to perform the required impairment tests, which involve the use of estimates related to the fair market values of the business operations with which goodwill is associated, during our fourth fiscal quarter. Calculating the fair market value of the reporting units requires significant estimates and assumptions by management. We estimate the fair value of our reporting units by applying third-party market value indicators to the respective reporting unit’s annual projected earnings before interest, taxes, depreciation and amortization. In applying this methodology, we rely on a number of factors, including future business plans, actual operating results and market data. In the event that our calculations indicate that goodwill is impaired, a fair value estimate of each tangible and intangible asset would be established. This process would require the application of discounted cash flows expected to be generated by each asset in addition to independent asset appraisals, as appropriate. Cash flow estimates are based on our historical experience and our internal business plans, and appropriate discount rates are applied. Losses, if any, resulting from goodwill impairment tests would be reflected in operating income in our income statement.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

Other Long-Lived Assets

We assess identifiable non-goodwill intangibles and other long-lived assets for impairment whenever events or changes in facts and circumstances indicate the possibility that the carrying value may not be recoverable. Factors considered important, which might trigger an impairment evaluation, include the following:

	§		significant under-performance relative to historical or projected future operating results;
	§		significant changes in the manner of our use of the acquired assets;
	§		significant changes in the strategy for our overall business; and
	§		significant negative industry or economic trends.

Additionally, we test all indefinitely-lived intangible assets for impairment annually. Measuring a potential impairment of non-goodwill intangibles and other long-lived assets requires various estimates and assumptions, including determining which cash flows are directly related to the asset being evaluated, the useful life over which those cash flows will occur, their amount and the asset’s residual value, if any. If we determine that the carrying value of these assets may not be recoverable based upon the existence of one or more of the above-described indicators, any impairment would be measured based on projected net cash flows expected from the asset(s), including eventual disposition. The determination of impairment loss would be based on the best information available, including internal discounted cash flows, quoted market prices when available and independent appraisals as appropriate to determine fair value. Cash flow estimates would be based on our historical experience and our internal business plans, with appropriate discount rates applied. We have not incurred any such impairment loss to date.

Deferred Income Taxes

The provision for income taxes is calculated in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred income taxes using the liability method. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in valuation allowances. We provide valuation allowances against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In determining the adequacy of the valuation allowance management considers cumulative and anticipated amounts of domestic and international earnings or losses, anticipated amounts of foreign source income, as well as the anticipated taxable income resulting from the reversal of future taxable temporary differences.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

We intend to maintain the recorded valuation allowances until sufficient positive evidence (for example, cumulative positive foreign earnings or additional foreign source income) exists to support a reversal of the tax valuation allowances.

Contingencies

We are party to claims and lawsuits arising in the normal course of business, including the various asbestos-related suits discussed in Note F to our Consolidated Financial Statements. Although we cannot precisely predict the amount of any liability that may ultimately arise with respect to any of these matters, we record provisions when we consider the liability probable and reasonably estimable. The provisions are based on historical experience and legal advice, are reviewed quarterly and are adjusted according to developments. Estimating probable losses requires analysis of multiple forecasted factors that often depend on judgments about potential actions by third parties such as regulators, courts and state and federal legislatures. Changes in the amount of the provisions affect our consolidated statements of income. Due to the inherent uncertainties in the loss reserve estimation process, we are unable to estimate an additional range of loss in excess of our accruals. We may incur asbestos costs in addition to any amounts reserved, which may have a material adverse effect on our financial condition, results of operations or cash flows.

Our environmental-related accruals are similarly established and/or adjusted as information becomes available upon which costs can be reasonably estimated. Here again, actual costs may vary from these estimates because of the inherent uncertainties involved, including the identification of new sites and the development of new information about contamination. Certain sites are still being investigated and, therefore, we have been unable to fully evaluate the ultimate cost for those sites. As a result, reserves have not been taken for certain of these sites and costs may ultimately exceed existing reserves for other sites. We have received indemnities for potential environmental issues from purchasers of certain of our properties and businesses and from sellers of some of the properties or businesses we have acquired. We have also purchased insurance to cover potential environmental liabilities at certain sites. If the indemnifying or insuring party fails to, or becomes unable to, fulfill its obligations under those agreements or policies, we may incur environmental costs in addition to any amounts reserved, which may have a material adverse effect on our financial condition, results of operations or cash flows.

Additionally, our operations are subject to various federal, state, local and foreign tax laws and regulations which govern, among other things, taxes on worldwide income. The calculation of our income tax expense is based on the best information available and involves significant management judgment. The actual income tax liability for each jurisdiction in any year can in some instances be ultimately determined several years after the financial statements are published.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

We maintain reserves for estimated income tax exposures for many different jurisdictions. Tax exposures are settled primarily through the resolution of audits within each tax jurisdiction or the closing of a statute of limitation. Exposures can also be affected by changes in applicable tax law or other factors, which may cause management to believe a revision of past estimates is appropriate. Management believes that an appropriate liability has been established for income tax exposures; however, actual results may materially differ from these estimates.

REPORTABLE SEGMENT INFORMATION

Our business is divided into two reportable operating segments: the consumer segment and the industrial segment. Within each reportable operating segment, individual groups of companies and product lines generally address common markets, utilize similar technologies, and are able to share manufacturing or distribution capabilities. We evaluate the profit performance of our segments based on income (loss) before income taxes, but also look to earnings (loss) before interest and taxes (“EBIT”) as a performance evaluation measure because interest expense is essentially related to corporate acquisitions, as opposed to segment operations.

In addition to the two reportable operating segments, there are certain business activities, referred to as corporate/other, that do not constitute an operating segment, including corporate administration and results of our captive insurance activities. In addition to the results for these items, the category “corporate/other” also includes the gains or losses on the sales of certain assets and other expenses not directly associated with either of our two reportable operating segments. Corporate/other assets consist primarily of investments, prepaid expenses, deferred pension assets, and headquarters’ property and equipment. These corporate and other expenses reconcile reportable operating segment data to total consolidated net sales, income (loss) before income taxes and identifiable assets. Comparative three month results on this basis are illustrated in the following table.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

		Three Months Ended
		August 31,
(In thousands)		2007				2006
Net Sales
Industrial Segment		$	607,953			$	545,254
Consumer Segment			322,386				298,907
Consolidated		$	930,339			$	844,161
Income (Loss) Before Income Taxes (a)
Industrial Segment
Income Before Income Taxes (a)		$	79,574			$	73,934
Interest (Expense), Net			(745	)			(75	)
EBIT (b)		$	80,319			$	74,009
Consumer Segment
Income Before Income Taxes (a)		$	42,929			$	41,358
Interest (Expense), Net			(853	)			(580	)
EBIT (b)		$	43,782			$	41,938
Corporate/Other
(Expense) Before Income Taxes (a)		$	(22,354	)		$	(21,007	)
Interest (Expense), Net			(11,120	)			(12,548	)
EBIT (b)		$	(11,234	)		$	(8,459	)
Consolidated
Income (Loss) Before Income Taxes (a)		$	100,149			$	94,285
Interest (Expense), Net			(12,718	)			(13,203	)
EBIT (b)		$	112,867			$	107,488

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

RESULTS OF OPERATIONS

Three Months Ended August 31, 2007

Net Sales

On a consolidated basis, net sales of $930.3 million for the first quarter ended August 31, 2007 grew 10.2 percent, or $86.2 million, over net sales of $844.2 million during the same period last year. Seven small acquisitions accounted for 3.2 percent of the growth over last year, or $27.2 million. Organic sales improvements accounted for 7.0 percent, or $59.0 million, of the growth in net sales over the prior year, including pricing initiatives representing 1.6 percent of the sales growth, or $13.4 million, and the impact of net favorable foreign exchange rates year-over-year which provided 2.0 percent, or $16.5 million. Net favorable foreign exchange gains resulted primarily from the stronger euro, but also from the Canadian dollar and certain Latin American and Asia-Pacific currencies.

Industrial segment net sales, which comprised 65.3 percent of the current quarter’s consolidated net sales, totaled $608.0 million, growing 11.5 percent from last year’s $545.3 million. This segment’s net sales growth resulted from the combination of five small acquisitions, which contributed 2.0 percent, plus organic sales growth, which accounted for 9.5 percent of the increase, including 2.4 percent from pricing and 2.4 percent from net favorable foreign exchange differences. The strong organic sales improvements in the industrial segment resulted from growth in most international businesses, polymer flooring, and corrosion and other coatings, with much of this growth related to ongoing industrial and commercial maintenance and improvement activities primarily in North America, but also in Europe, Latin America and other regions of the world, as well as increased new construction in those sectors. We continue to secure new business and grow market share among our industrial segment operations.

Consumer segment net sales, which comprised 34.7 percent of the current quarter’s consolidated net sales, increased 7.9 percent to $322.4 million from last year’s $298.9 million. This segment’s net sales growth resulted primarily from two small acquisitions, which contributed 5.6 percent of the growth in net sales over the prior year. Organic sales improvements provided the remaining 2.3 percent of the net sales growth, including the impact of net favorable foreign exchange, which contributed 1.0 percent. The stable organic sales performance in the consumer segment is principally the result of fluctuating retail buying behavior among major retail customers, offset slightly by declines in existing homes turnover and, to a lesser extent, new housing starts, which have affected several product lines in the consumer segment.

Gross Profit Margin

Consolidated gross profit margin improved to 41.3 percent of net sales this first quarter from 40.9 percent for the same period a year ago. While the cost of certain of our key raw materials remained higher over the same period a year ago, such as zinc products, epoxies, and various

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

solvents and resins, we began to see the costs of certain of our other key materials stabilize or decline, such as asphalts and copper. While the impact of higher raw material costs weighed on this margin (approximately 50 basis points, or “bps”), there were a number of price increases that have been initiated throughout the operating segments during the past 12 months, which more than offset these higher costs (approximately 90 bps).

Industrial segment gross profit margin for the first quarter improved to 42.0 percent of net sales from 41.7 percent last year. The improvement is the result of higher pricing initiatives beginning to take hold (130 bps), partly offset by certain continued higher raw material costs during the quarter (approximately 80 bps). Productivity gains from 4.7 percent organic unit sales growth slightly offset increased lower-margin services sales.

Consumer segment gross profit margin for this first quarter improved to 39.9 percent of net sales from 39.4 percent last year. This improvement, of approximately 50 bps, results from a combination of certain key raw materials costs stabilizing over the last few recent months, a more favorable mix of sales, and productivity gains from 1.2 percent organic unit sales growth this quarter.

Selling, General and Administrative Expenses (“SG&A”)

Consolidated SG&A as a percentage of sales increased to 29.1 percent of net sales compared with 28.1 percent a year ago. The increase includes the effects of foreign exchange, prior year acquisitions, and continuing investments in various growth-related initiatives. Partly offsetting those higher costs was the leverage from the 5.0 percent organic growth in sales, including higher pricing, in addition to lower costs related to certain postemployment benefits and hospitalization costs.

Industrial segment SG&A increased by 70 bps to 28.8 percent of net sales this first quarter from 28.1 percent a year ago, reflecting principally higher employment-related costs, in addition to higher freight and warranty claims, partly offset by the leverage of organic sales growth.

Consumer segment SG&A as a percent of net sales this first quarter increased by 100 bps to 26.3 percent compared with 25.3 percent a year ago, reflecting certain higher employment-related costs, in addition to investments in various growth initiatives.

Corporate/Other SG&A expenses increased during this year’s first quarter to $11.2 million from $8.5 million during last year’s first quarter. This increase is mainly the result of certain higher insurance-related reserve adjustments, higher legal-related costs and additional restricted stock grants made under the Omnibus Equity and Incentive Plan.

License fee and joint venture income of approximately $0.6 million and $0.7 million for each of the quarters ended August 31, 2007 and 2006, respectively, are reflected as reductions of consolidated SG&A expenses.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

We recorded total net periodic pension and postretirement benefit costs of $4.9 million and $5.0 million for the quarters ended August 31, 2007 and 2006, respectively. This decreased pension expense of $0.1 million was attributable to increased pension service and interest costs approximating $1.1 million, offset by a combination of net actuarial gains incurred of $0.3 million and an improvement in the expected return on plan assets of $0.9 million. We expect that pension expense will fluctuate on a year-to-year basis depending upon the investment performance of plan assets, but such changes are not expected to be material as a percentage of income before income taxes.

Net Interest Expense

Net interest expense was $0.5 million lower in the first quarter of fiscal 2008 than in the corresponding period of fiscal 2007. During last year’s first fiscal quarter, we prepaid our 6.61% Senior Notes, Series B, due November 15, 2006, and our 7.30% Senior Notes, Series C, due November 15, 2008 (collectively, the “Notes”). This nonrecurring $1.1 million make-whole payment, combined with our improved investment income performance year-over-year of approximately $1.7 million, more than offset additional interest expense year-over-year of $2.3 million. The interest expense is associated primarily with interest rates, which overall averaged 6.0 percent during the quarter, compared with 5.4 percent in the prior year first quarter, accounting for $1.6 million of the interest cost increase. Additionally, higher weighted-average net borrowings associated with recent acquisitions, approximating $23.1 million, combined with slight increases in other debt, added $0.7 million of interest cost.

Income Before Income Taxes (“IBT”)

Consolidated IBT for this year’s first quarter improved by $5.9 million, or 6.2 percent, to $100.1 million from $94.3 million during last year’s first quarter, with margin comparisons of 10.8 percent of net sales versus 11.2 percent a year ago.

Industrial segment IBT improved by $5.6 million, to $79.6 million from last year’s $73.9 million, as a result of the favorable growth in organic sales, offset partly by higher freight and compensation-related costs. Consumer segment IBT improved by 3.8 percent, to $42.9 million from $41.4 million last year, as a result of the favorable impact of acquisitions, offset by certain higher freight and compensation-related costs.

Income Tax Rate

The effective income tax expense rate was 31.8 percent for the three months ended August 31, 2007 compared to an effective income tax expense rate of 34.9 percent for the three months ended August 31, 2006.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

For the three months ended August 31, 2007 and, to a lesser extent for the three months ended August 31, 2006, the effective tax rate differed from the federal statutory rate due to decreases in the effective tax rate principally as a result of certain tax credits and by the U.S. tax impact of foreign operations. Furthermore, during the three months ended August 31, 2007, a decrease in the effective income tax expense rate resulted from incremental U.S. tax benefits associated with the domestic manufacturing deduction and lower tax rates on non-U.S. earnings. The decreases in the effective tax rate were partially offset by valuation allowances associated with losses incurred by certain of our foreign businesses, state and local income taxes and other non-deductible business operating expenses. Additionally, during the three months ended August 31, 2006, the decrease in the effective tax rate was further offset by a valuation allowance related to U.S. federal foreign tax credit carryforwards.

As of August 31, 2007, we have determined, based on the available evidence, that it is uncertain whether we will be able to recognize certain deferred tax assets and have recorded a valuation allowance against such deferred tax assets. The valuation allowance relates to U.S. federal foreign tax credit carryforwards, certain foreign net operating losses and net foreign deferred tax assets recorded in purchase accounting. We intend to maintain the valuation allowance recorded as of August 31, 2007 for certain deferred tax assets until sufficient positive evidence (for example, cumulative positive foreign earnings or additional foreign source income) exists to support the reversal of the tax valuation allowance. A portion of the valuation allowance is associated with deferred tax assets recorded in purchase accounting. Any reversal of the valuation allowance that was recorded in purchase accounting would reduce goodwill.

Net Income

Net income of $68.3 million for the three months ended August 31, 2007 compares to $61.3 million for the same period last year. Margin on sales of 7.3 percent during this year’s first quarter was flat versus the margin for last year’s first quarter, mostly the result of the combination of higher organic unit sales volume, favorable acquisitions and the impact of pricing initiatives, offset by certain higher freight and compensation-related costs.

Diluted earnings per common share for this year’s first quarter improved by 8.2 percent to $0.53 from $0.49 a year ago.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows From:

Operating Activities

Operating activities generated negative cash flow of $3.0 million during first quarter of fiscal 2008 compared with $23.1 million of positive cash flow generated during the same three month

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

period of fiscal 2007, a net decrease of $26.1 million. Factoring out the after-tax asbestos-related cash payments for the first quarter of fiscal 2008 and 2007 of $14.7 million and $10.5 million, respectively, operating activities generated positive cash flow of $11.6 million during the first quarter of fiscal 2008 compared with $33.6 million during the same three month period a year ago, down $22.0 million.

Operating working capital was a use of cash for this year’s first three months, approximating $76.4 million, versus last year’s first quarter use of cash of $49.3 million, resulting in an additional use of cash of $27.1 million period-over-period. While trade accounts receivable provided $69.0 million of cash during the current quarter versus $51.9 million last year, a $17.1 million favorable change in cash flow period-over-period, inventories required $33.0 million of cash during the first quarter this year versus $17.4 million last year, or $15.6 million more operating cash period-over-period. As a result of these inventory builds, associated primarily with a challenging retail market, days outstanding in inventory increased by 9.7 days versus May 31, 2007. Additionally, accounts payable required $70.1 million in cash during the first quarter versus $46.5 million last year, or $23.6 million additional cash period-over-period, mainly as a result of the higher inventory levels and the timing of payments. All other remaining balance sheet changes related to changes in working capital had a net unfavorable impact of $5.0 million.

Changes in items not affecting cash and other was a use of cash of $1.1 million.

Changes in long-term and short-term asbestos related reserves, net of taxes, of $14.7 million in the first three months of fiscal 2008 were up $4.2 million versus $10.5 million in the comparable period of fiscal 2007.

Cash provided from operations along with available credit lines, as required, remain our primary source of financing internal growth, with limited use of short-term debt.

Investing Activities

Capital expenditures, other than for ordinary repairs and replacements, are made to accommodate our continued growth through improved production and distribution efficiencies and capacity, and to enhance administration. Capital expenditures of $5.5 million during the current quarter compare with depreciation of $15.4 million. While we are not a capital intensive business, and capital expenditures generally do not exceed depreciation in a given year, capital spending is expected to slightly outpace our depreciation levels for the next several years as additional capacity is brought on-line to support our continued growth. With this additional minor plant expansion, we believe there will be adequate production capacity to meet our needs for the next several years at normal growth rates.

During this year’s first three months, we invested a total of $3.4 million for acquisitions.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

Our captive insurance companies invest in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in the amounts related to these activities on a year-over-year basis are attributable to differences in the timing and performance of their investments.

Financing Activities

On December 29, 2006, we replaced our $330.0 million revolving credit facility with a $400.0 million 5-year credit facility (the “New Facility”). The New Facility will be used for working capital needs, general corporate purposes, including acquisitions and to provide back-up liquidity for the issuance of commercial paper. The New Facility provides for borrowings in U.S. dollars and several foreign currencies and provides sublimits for the issuance of letters of credit in an aggregate amount of up to $35.0 million and a swing-line of up to $20.0 million for short-term borrowings of less than 15 days. In addition, the size of the New Facility may be expanded upon our request by up to an additional $175.0 million, thus potentially expanding the New Facility to $575.0 million, subject to lender approval.

On July 18, 2006, we prepaid our 6.61% Senior Notes, Series B, due November 15, 2006, and our 7.30% Senior Notes, Series C, due November 15, 2008 (collectively, the “Notes”). We paid all amounts due pursuant to the terms of the Purchase Agreement and did not incur any material early termination penalties in connection with our termination of the Notes.

In July 2006, we amended both our accounts receivable securitization and revolving credit facility agreements to redefine EBITDA, effective May 31, 2006.

We are exposed to market risk associated with interest rates. We do not use financial derivative instruments for trading purposes, nor do we engage in foreign currency, commodity or interest rate speculation. In addition to the hedge risk associated with our 6.7% Senior Unsecured Notes discussed above, our only other hedged risks are associated with certain fixed debt whereby we have a $200.0 million notional amount interest rate swap contract designated as a fair value hedge to pay floating rates of interest based on six-month LIBOR that matures in fiscal 2010. Because critical terms of the debt and interest rate swap match, the hedge is considered perfectly effective against changes in fair value of debt, and therefore, there is no need to periodically reassess the effectiveness during the term of the hedge.

Our available liquidity beyond our cash balance at August 31, 2007 stood at $282.9 million. Our debt-to-capital ratio was 47.2% at August 31, 2007 compared with 47.6% at May 31, 2007. Had we been able to reduce our total outstanding debt by all of our cash and short-term investments available as of August 31, 2007 and May 31, 2007, our adjusted net (of cash) debt-to-capital ratio would have been 43.0% and 43.3%, respectively.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

The following table summarizes our financial obligations and their expected maturities at August 31, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in the periods indicated.

Contractual Obligations

(In thousands)

		Total
		Contractual
		Payment				Payments Due In
		Stream				2008				2009-10				2011-12				After 2012
Long-term debt obligations		$	1,024,056			$	102,322			$	229,473			$	339,371			$	352,890
Operating lease obligations			98,087				27,328				34,482				14,245				22,032
Other long-term liabilities (1)			360,724				62,251				78,533				76,769				143,171
Total		$	1,482,867			$	191,901			$	342,488			$	430,385			$	518,093

We maintain excellent relations with our banks and other financial institutions to provide continual access to financing for future growth opportunities.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financings, other than the minimum operating lease commitments included per the above Contractual Obligations table. We have no subsidiaries that are not included in our financial statements, nor do we have any interests in or relationships with any special purpose entities that are not reflected in our financial statements.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

OTHER MATTERS

Environmental Matters

Environmental obligations continue to be appropriately addressed and, based upon the latest available information, it is not anticipated that the outcome of such matters will materially affect the Company’s results of operations or financial condition. Our critical accounting policies and estimates set forth above describe our method of establishing and adjusting environmental-related accruals and should be read in conjunction with this disclosure. (For additional information, refer to “Part II, Item 1. Legal Proceedings.”)

FORWARD–LOOKING STATEMENTS

The foregoing discussion includes forward-looking statements relating to our business. These forward-looking statements, or other statements made by us, are made based on management’s expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) general economic conditions; (b) the price, supply and capacity of raw materials, including assorted resins and solvents; packaging, including plastic containers; and transportation services, including fuel surcharges; (c) continued growth in demand for our products; (d) legal, environmental and litigation risks inherent in our construction and chemicals businesses and risks related to the adequacy of our insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon our foreign operations; (g) the effect of non-currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with our ongoing acquisition and divestiture activities; (i) risks related to the adequacy of its contingent liability reserves, including for asbestos-related claims; and (j) other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2007, as the same may be updated from time to time. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.

RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2007

RPM INTERNATIONAL INC. AND SUBSIDIARIES

RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION

malignancy and non-malignancy claims and the amount of defense costs incurred during the period.

For additional information on our asbestos litigation, including a discussion of our asbestos reserve, see Note F of the Notes to Consolidated Financial Statements.

EIFS Litigation

As of August 31, 2007, Dryvit was a defendant or co-defendant in various single family residential exterior insulated finish systems (“EIFS”) cases, the majority of which are pending in the southeastern region of the country. Dryvit is also defending EIFS lawsuits involving commercial structures, townhouses and condominiums. The vast majority of Dryvit’s EIFS lawsuits seek monetary relief for water intrusion related property damages, although some claims in certain lawsuits allege personal injuries from exposure to mold.

Dryvit is a defendant in a class action lawsuit filed on November 14, 2000 in Jefferson County, Tennessee styled Bobby R. Posey, et al. v. Dryvit Systems, Inc. (formerly styled William J. Humphrey, et al. v. Dryvit Systems, Inc. ) (Case No. 17,715-IV) ( “Posey” ). A preliminary approval order was entered on April 8, 2002 in the Posey case for a proposed nationwide class action settlement which was subsequently approved after several appeals. The deadline for filing claims in the Posey class action expired on June 5, 2004 and claims have been processed during the pendency of the various appeals. On September 15, 2005, a final, non-appealable order was entered finally approving the nationwide class. As of August 31, 2007, there were approximately 7,198 total claims which had been filed pursuant to the Posey Class action settlement. Of these 7,198 claims, approximately 4,410 claims have been rejected or closed for various reasons under the terms of the settlement. Approximately 1,131 of the remaining claims are at various stages of review and processing under the terms of the settlement and it is possible that some of these claims will be rejected or closed without payment. As of August 31, 2007, a total of 1,657 claims have been paid for a total of approximately $13.7 million. Additional payments have and will continue to be made under the terms of the settlement agreement which include inspection costs, third party warranties and class counsel attorneys’ fees.

Third party excess insurers have historically paid varying shares of Dryvit’s defense and settlement costs in the individual commercial and residential EIFS lawsuits under various cost-sharing agreements. Dryvit has assumed a greater share of the costs associated with its EIFS litigation as it seeks funding commitments from our third party excess insurers and will likely continue to do so pending the outcome of coverage litigation involving these same third party insurers. One of our excess insurers filed suit seeking a declaration with respect to its rights and obligations for EIFS related claims under its applicable policies. During last year’s third fiscal quarter, the court granted Dryvit’s motion to stay or dismiss the federal filing based on a more complete state court complaint filed against these same insurers and the Company’s insurance broker. The coverage case is now proceeding in state court. Discovery in this litigation is ongoing. The trial is scheduled for June 16, 2008. One insurer appealed the trial court’s order granting Dryvit certain discovery of allegedly privileged claim file documents, and the court of appeals dismissed the appeal on September 12, 2007. However, the insurer has filed a motion

RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION

for reconsideration, which may result in a continuance of the trial date when the case is returned to the trial court. For a discussion of the existing reserves related to our Dryvit EIFS litigation, see Note F to the Consolidated Financial Statements.

Environmental Proceedings

As previously reported, several of our subsidiaries are, from time to time, identified as a “potentially responsible party” under the federal Comprehensive Environmental Response, Compensation and Liability Act and similar state environmental statutes. In some cases, our subsidiaries are participating in the cost of certain clean-up efforts or other remedial actions. Our share of such costs, however, has not been material and management believes that these environmental proceedings will not have a material adverse effect on our consolidated financial condition or results of operations. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Matters,” in Part I of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2007.

ITEM 6. EXHIBITS