Results of Operations

Revenues and Operating Profit by Segment are as follows

Total Revenues

        Total revenues for fiscal 2009 decreased $24,872,000 or 19% to $107,606,000 from $132,478,000 in the prior year. Revenues in our Specialized Manufacturing segment decreased $21,941,000 or 19% to $91,236,000 for the year ended August 31, 2009 compared to $113,177,000 in fiscal 2008. The decrease in revenues from our Specialized Manufacturing segment in fiscal 2009 was primarily due to the following: (a) decreased sales of $6,263,000 in the Electronic Coatings product lines due to reduced demand in the electronic and automotive markets; (b) decreased sales of $7,546,000 in the Wire & Cable market primarily due to less demand in the energy and communications markets; (c) decreased sales of $2,392,000 in the Pipeline and Construction product lines; and (d) decreased sales of $5,014,000 in Specialty products.

        Revenues from our Electronic Manufacturing Services segment decreased $2,931,000 or 15% to $16,370,000 for the year ended August 31, 2009 compared to $19,301,000 for fiscal 2008. The reduced sales in fiscal 2009 is primarily a result of decreased customer orders and projects as many of our key customers continue to assess their inventory levels and closely monitor their own customers' demand during this economic downturn. The backlog for this segment as of August 31, 2009 was $6,500,000 compared to $8,500,000 at August 31, 2008.

        Royalties and commissions in the Specialized Manufacturing segment were $1,077,000, $1,775,000 and $1,792,000 for the years ended August 31, 2009, 2008 and 2007, respectively. The decrease in royalties and commissions in fiscal 2009 from the prior two fiscal years was due to decreased sales of conformal coatings from our licensed manufacturer in Asia.

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        Export sales from domestic operations to unaffiliated third parties were $14,611,000, $15,818,000 and $14,126,000 for the years ended August 31, 2009, 2008 and 2007, respectively. We anticipate future growth in our export sales due to the C.I.M. acquisition that was recently completed in September 2009.

        Total revenues for fiscal 2008 increased $5,018,000 or 4% to $132,478,000 from $127,460,000 in fiscal 2007. Revenues in our Specialized Manufacturing segment increased $3,982,000 or 4% to $113,177,000 for the year ended August 31, 2008 compared to $109,195,000 in fiscal 2007. The increase in revenues from this segment in fiscal 2008 was primarily due to increased sales related to the following: (a) the operations acquired by HumiSeal Europe SARL in March 2007 and Chase Protective Coatings Ltd. in September 2007 which combined accounted for the majority of the $5,546,000 increased revenue from European operations; (b) increased sales of $1,578,000 from the Pipeline product line; (c) increased sales of $1,616,000 from the Electronic Coatings product line; and (d) increased sales of $926,000 from a large, nonrecurring construction project that was completed in fiscal 2008 year. These increases were partially offset by the following: (a) decreased sales of $2,477,000 in the Wire & Cable market primarily due to decreased demand for building wire, insulation and identification tapes during fiscal 2008; (b) decreased sales of $1,549,000 in the Transportation and Packaging & Industrial product lines; and (c) decreased sales of $945,000 in the Construction product line primarily due to the reduction in Rosphalt 50® project sales which had experienced record levels in fiscal 2007.

        The Electronic Manufacturing Services segment achieved record revenues in fiscal 2008 which increased $1,036,000 or 6% to $19,301,000 compared to $18,265,000 in fiscal 2007. This was primarily due to increased order activity from existing customers as well as several new customers added during fiscal year 2008.

        Cost of products and services sold in our Specialized Manufacturing segment were $62,261,000 for the fiscal year ended August 31, 2009 compared to $73,768,000 in fiscal 2008. As a percentage of revenues, cost of products and services sold in the Specialized Manufacturing segment increased due to decreased sales of our higher margin products and the resulting larger share of total sales that were made up of lower margin products, coupled with the impact of fixed manufacturing overhead costs on a lower revenue base. These increases were partially offset by the favorable impact of ongoing cost reduction efforts and continued focus on raw material costs through supply chain management. We continue to face challenges with margin pressures across many of our key product lines.

        Cost of products and services sold in our Electronic Manufacturing Services segment were $13,481,000 for the fiscal year ended August 31, 2009 compared to $15,912,000 in fiscal 2008. As a percentage of revenues, cost of products and services sold in the Electronic Manufacturing Services segment remained relatively flat as cost savings initiatives were able to offset our fixed costs on a lower revenue base and some increased costs related to facility and production improvements that were incurred earlier in the current fiscal year as a result of this segment's focus on generating new customer orders.

        In fiscal 2008, cost of products and services sold increased $1,790,000 or 2% to $89,680,000 compared to $87,890,000 in the prior fiscal year. As a percentage of revenues, cost of products and services sold decreased to 68% in fiscal 2008 compared to 69% for fiscal 2007. Cost of products and services sold in our Specialized Manufacturing segment were $73,768,000 for the fiscal year ended August 31, 2008 compared to $72,896,000 in fiscal 2007. The dollar value increase in cost of products and services sold in this segment during fiscal 2008 was primarily attributable to increased revenues offset by our emphasis on leveraging fixed costs and improving

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manufacturing efficiencies. The decrease in cost of products and services sold as a percentage of revenues in this segment during fiscal 2008 was a direct result of a favorable product mix coupled with continued focus and scrutiny on material purchases that helped stabilize margins on many of our key product lines.

        Cost of products and services sold in our Electronic Manufacturing Services segment were $15,912,000 for the fiscal year ended August 31, 2008 compared to $14,994,000 in fiscal 2007. As a percentage of revenues, cost of products and services sold in this segment remained flat in fiscal 2008 compared to 2007. This reflects increased manufacturing costs and competitive pricing pressures placed on this segment by many of its key customers in fiscal 2008, offset by our ability to leverage fixed overhead costs on a higher revenue base.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses decreased $1,966,000 or 8% to $21,985,000 during fiscal 2009 compared to $23,951,000 in fiscal 2008. As a percentage of revenues, selling, general and administrative expenses increased to 20% in fiscal 2009 compared to 18% for fiscal 2008. The dollar decrease in fiscal 2009 relates primarily to our continued emphasis on controlling costs, including reduced annual incentive compensation, travel and external consulting costs. Additionally, lower revenues in fiscal 2009 compared to the prior year have led to decreased sales commissions and other selling related expenses.

        Selling, general and administrative expenses increased $1,530,000 or 7% to $23,951,000 during fiscal 2008 compared to $22,421,000 in fiscal 2007. As a percentage of revenues, selling, general and administrative expenses remained flat at 18% for the years ended August 31, 2008 and 2007. The dollar increase in fiscal 2008 related primarily to increased employee head count due to acquisitions along with rising employee-related benefits, including health care costs, and increased stock based compensation costs of approximately $778,000 related to our long term incentive plan. The increases in fiscal 2008 were partially offset by a decrease of approximately $300,000 in costs related to professional services required for compliance with the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act compared to fiscal 2007, which was our initial year of compliance.

        In fiscal 2009, we had recoveries of previously identified bad debt that exceeded additions to bad debt expense for the year, resulting in a net gain of $41,000. This gain of $41,000 in fiscal 2009 compared to bad debt expense of $53,000 and $268,000 in fiscal 2008 and 2007, respectively. The improvements in both fiscal 2009 and 2008 as compared to fiscal 2007 were the direct result of management's strict adherence to its established credit policies as well as closely monitoring the accounts receivable function and taking a proactive approach to the collections process.

Loss on Impairment of Goodwill

        In fiscal 2009, based on the decrease in sales activity in the current year and the completion of the fiscal 2010 budget, we determined that the carrying value of goodwill associated with our Northeast Quality Products ("NEQP") division may not be recoverable. Accordingly, we performed a goodwill impairment analysis. Based on the present value of future cash flows utilizing projected results for the balance of fiscal year 2009 and projections for future years based on the fiscal year 2010 budgeting process, the goodwill impairment analysis yielded results that would not support the current book value of the goodwill associated with this division. As a result, we concluded that the carrying amount of goodwill for the NEQP division was not fully recoverable and an impairment charge of $237,000 was recorded as of May 31, 2009. Goodwill related to NEQP, having a pre-impairment book value of $349,000, was written down to its fair value of $112,000 in accordance with generally accepted accounting principles. The NEQP division was sold on August 14, 2009, and the adjusted fair value of $112,000 was realized upon the sale.

Loss on Impairment of Fixed Assets

        In fiscal 2009, we recorded a $262,000 charge related to the impairment of real property (land and building) located in West Bridgewater, MA which was being leased to Sunburst Electronics Manufacturing Solutions, Inc. The real property, having a pre-impairment book value of $1,632,000, was written down to its fair value of $1,370,000, which was realized upon the June 24, 2009 sale of the property.

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Interest Expense

        Interest expense was $17,000 in fiscal 2009 compared to $40,000 and $900,000 in fiscal 2008 and 2007, respectively. The decrease in interest expense during the past two fiscal years is a direct result of a reduction in our overall debt balances through principal payments from operating cash flow. We anticipate an increase to interest expense in fiscal 2010 due to our $10 million term loan agreement and $3 million promissory notes related to the acquisition of C.I.M. in September 2009.

Other Income

        Other income decreased $19,000 to $458,000 in fiscal 2009 compared to $477,000 and $241,000 in fiscal 2008 and 2007, respectively. Other income includes bank interest and foreign exchange gains in Europe earned by our Humiseal Europe division and rental income of $149,000 on real property (building and land) that we owned and leased to Sunburst Electronic Manufacturing Solutions, Inc. (and subsequently sold in June 2009 as discussed previously). The increase in fiscal 2008 compared to 2007 consists primarily of bank interest and exchange gains earned by our HumiSeal Europe division.

Income Taxes

        The effective tax rate for fiscal 2009 was 34.9% compared to 35.8% and 37.0% in fiscal 2008 and 2007, respectively. In all three years, we have received the benefit of the domestic production deduction and foreign rate differential. The decrease in the effective tax rate in fiscal 2009 as compared to fiscal 2008 is primarily due to a more favorable effective state income tax rate in 2009. The effective tax rate of 35.8% for fiscal 2008 compares favorably to 2007 due to an increase in the applicable domestic production deduction for the year.

Net Income

        Net income in fiscal 2009 decreased $5,989,000 or 48% to $6,385,000 compared to $12,374,000 in fiscal 2008. The decrease in net income in the current year is a direct result of decreased revenue across all of our core product lines as discussed previously. Additionally, net income was negatively impacted in the current year by the impairment of our West Bridgewater, MA real property and the impairment of goodwill from NEQP.

        Net income in fiscal 2008 increased $2,181,000 or 21% to $12,374,000 compared to $10,193,000 in fiscal 2007. The increase in net income in 2008 was primarily due to increased revenue growth in our core product lines coupled with favorable product mix and our ability to leverage our fixed costs and properly manage increasing raw material costs. In fiscal 2007, net income was negatively impacted by higher expenses incurred related to our first year of compliance with Section 404 of the Sarbanes-Oxley Act and the loss on impairment of goodwill from NEQP.

Liquidity and Sources of Capital

        Our overall cash balance increased $7,726,000 to $11,643,000 at August 31, 2009 from $3,917,000 at August 31, 2008. The increased cash balance at August 31, 2009 was a result of cash flow generated from operations during the year as well as the sale of the West Bridgewater property. We continue to review our current cash balances denominated in foreign currency in light of current tax guidelines and potential acquisitions. The higher cash balance of $3,917,000 at August 31, 2008 compared to $2,444,000 at August 31, 2007 was primarily the result of cash flow generated during the year, after a portion was used to repay all outstanding balances on our existing debt.

        Cash flow provided by operations was $16,907,000 for the year ended August 31, 2009 compared to $15,562,000 in fiscal 2008 and $14,498,000 in fiscal 2007. Cash provided by operations during fiscal 2009 was primarily due to operating income and decreased accounts receivable and inventory balances, offset by reduced accounts payable balances. Cash provided by operations during fiscal 2008 was primarily due to operating income and increased accounts payable and accrued expenses, offset by purchases of raw materials. Cash provided by operations during fiscal 2007 was primarily due to operating income and decreased inventory balances offset by increased accounts receivable balances.

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        The ratio of current assets to current liabilities was 3.2 as of August 31, 2009 compared to 2.3 as of August 31, 2008. The increase in our current ratio at August 31, 2009 was primarily attributable to increased cash and a decrease in accounts payable and accrued liabilities partially offset by decreases in accounts receivable and inventory.

        Cash flow used in investing activities was $5,234,000 for the year ended August 31, 2009 compared to $5,796,000 in fiscal 2008 and $7,542,000 in fiscal 2007. During fiscal 2009, cash flow used in investing activities was primarily due to $2,509,000 used to pay for the purchase of real property in Oxford, MA, $1,280,000 paid for purchases related to the build out of our manufacturing facility in Pittsburgh, PA, and purchases of machinery and equipment at our other manufacturing locations. During fiscal 2008, cash flow used in investing activities was primarily due to $1,490,000 paid for the assets acquired by Chase Protective Coatings Ltd., purchases related to the build out of our manufacturing facility in Pittsburgh of $934,000, contingent payments related to previous acquisitions of $1,041,000, and cash paid for purchases of machinery and equipment at our other manufacturing locations. During fiscal 2007, cash flow used in investing activities was primarily due to the acquisition of Capital Services, the acquisition of certain assets from Metronelec SARL, and cash paid for purchases of property, plant and equipment.

        Cash flow used in financing activities was $3,856,000 for the year ended August 31, 2009 compared to $7,909,000 in fiscal 2008 and $7,049,000 in fiscal 2007. During fiscal 2009, cash flow used in financing activities reflects the payment of the annual dividend and payments of statutory minimum taxes on restricted stock. During fiscal 2008, cash flow used in financing activities reflected the annual dividend payment and our ability to use excess cash generated from operating results to pay off existing long-term debt, including $4,033,000 to pay the total outstanding balances of the term notes used to finance our acquisitions of Concoat Holdings Limited (acquired in October 2005) and Capital Services of New York, Inc. (acquired in September 2006). During fiscal 2007, cash flow used in financing activities was primarily due to our ability to use excess cash generated from operating results to pay off existing long-term debt and the annual dividend payment, partially offset by the excess tax benefit from the exercise of employee stock options.

        On October 14, 2008, we announced a cash dividend of $0.35 per share (totaling $2,986,000) to shareholders of record on October 31, 2008 and payable on December 3, 2008.

        On October 15, 2009, we announced a cash dividend of $0.20 per share (totaling $1,759,000) to shareholders of record on October 31, 2009 and payable on December 3, 2009.

        We continue to have long-term unsecured credit available with Bank of America up to a maximum amount of $10 million at the bank's base lending rate or, at the option of the Company, at the effective 30-Day London Interbank Offered Rate (LIBOR) plus 1.25 percent. As of August 31, 2009 and October 31, 2009, the entire amount of $10 million was available for use under this credit facility. We plan to use this availability to help finance our cash needs, including acquisitions, in fiscal 2010 and future periods.

        Under the terms of our credit facility, we must comply with certain debt covenants related to (a) the ratio of total liabilities to tangible net worth and (b) the ratio of operating cash flow to debt service on a rolling twelve month basis. We were in compliance with our debt covenants as of August 31, 2009. The credit facility currently has a maturity date of March 31, 2011.

        We borrowed $10 million from Bank of America in September 2009 in order to fund our acquisition of C.I.M. This borrowing involved an unsecured, three year term note with interest and principal payments due monthly. Interest is calculated at the applicable LIBOR rate plus a margin of 1.75% per annum, with interest payments due on the last day of each month. At October 31, 2009, the applicable interest rate was 2.0% per annum. In addition to monthly interest payments, Chase Corporation will repay the principal in equal installments of $167,000 per month, beginning on September 30, 2009, and on the last day of each month thereafter, ending on August 31, 2012. In any event, on the last day of the Repayment Period, Chase will repay the remaining principal balance plus any interest then due. The loan is subject to the same debt covenants as our primary credit facility discussed above. Prepayment of the note is allowed at any time during the term of the loan.

        As part of the C.I.M. acquisition in September 2009, we delivered $3,000,000 in non-negotiable promissory notes (the "Notes") payable to five C.I.M. shareholders, who were the holders of all of the issued and outstanding shares of capital stock of C.I.M. as of the acquisition date. The principal of the Notes will be paid in three consecutive annual installments of $1,000,000 each, with the initial payment due on September 4, 2010. Interest on the unpaid principal balance of the Notes will accrue at a rate per annum equal to the applicable Federal rate,

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and will be paid annually with each principal payment. At October 31, 2009, the applicable interest rate was 0.75% per annum.

        In December 2008, we acquired real property (land and building) in Oxford, MA in order to reduce off-site storage expenses and provide capacity for future growth. Machinery and equipment will be added as needed to increase capacity or enhance operating efficiencies in our other manufacturing plants. Furthermore, we may consider the acquisition of companies or other assets in fiscal 2010 or future periods which are complementary to our business. We believe that our existing resources, including our primary credit facility, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurances that additional financing will be available at favorable terms, if at all.

        To the extent that interest rates increase in future periods, we will assess the impact of these higher interest rates on the financial and cash flow projections of our potential acquisitions.

        We have no significant off balance sheet arrangements.

Contractual Obligations

        The following table summarizes our contractual cash obligations at August 31, 2009 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

        The table above does not include payment obligations under the $10 million borrowing from Bank of America that we used to finance the C.I.M. acquisition, or the related $3 million in promissory notes we issued in the same acquisition, because they were incurred after our fiscal year end. The payment terms of each of those obligations are described above under "Liquidity and Sources of Capital." We have no other outstanding long term indebtedness.

Recently Issued Accounting Standards

        In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("FAS 141R"), which replaces FAS 141. FAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; expenses acquisition related costs as incurred; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We adopted FAS 141R as of September 4, 2009, with our acquisition of C.I.M. which will be accounted for under this standard.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"). FAS 159 permits companies to choose to measure many financial instruments and certain

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other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. We adopted FAS 159 as of September 1, 2008, and elected to not apply the provisions of FAS 159 to any of our eligible assets and liabilities. As such, the adoption of FAS 159 did not impact our consolidated financial position or results of operation. Any future transacted financial asset or liability will be evaluated for the fair value election as prescribed by FAS 159.

        In February 2008, the FASB issued SFAS 157-2, "Effective Date of FASB Statement No. 157" ("FAS 157-2"), which provides a one-year deferral of the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. The implementation of FAS 157 for financial assets and financial liabilities, effective September 1, 2008, did not have a material impact on our consolidated financial position and results of operations. We are currently assessing the impact of FAS 157-2 for nonfinancial assets and nonfinancial liabilities on our consolidated financial position and results of operations.

        In December 2008, the FASB issued Financial Staff Position ("FSP") SFAS No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132R-1"). FSP 132R-1 provides guidance on an employer's disclosures about plan assets of a defined benefit plan or other post-retirement plan enabling users of the financial statements to assess the inputs and valuation techniques used to develop fair value measurements of plan assets at the annual reporting date. Disclosures shall provide users an understanding of significant concentrations of risk in plan assets. FSP 132R-1 shall be applied prospectively for fiscal years ending after December 15, 2009, with early application permitted. We are currently assessing the impact FSP 132R-1 will have on our consolidated financial position and results of operations.

        In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("FAS 165"), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. FAS 165 is effective for interim and annual periods ending after June 15, 2009 and is effective for us beginning with this reporting period. Accordingly, we have adopted this pronouncement, which did not have a material impact on our results of operations or financial condition. The disclosures required by FAS 165 have been made in Note 22 to the Consolidated Financial Statements included in this Report.

        In June 2009, the FASB approved the "FASB Accounting Standards Codification" (the "Codification") as the single source of authoritative nongovernmental U.S. GAAP to be launched on July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification is effective for us in the interim period ending November 30, 2009 and it will not have a material impact on our consolidated financial position, results of operations or cash flows.

Critical Accounting Policies, Judgments, and Estimates

        The U.S. Securities and Exchange Commission ("SEC") requires companies to provide additional disclosure and commentary on their most critical accounting policies. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and requires management to make its most significant estimates and judgments in the preparation of its consolidated financial statements. Our critical accounting policies are described below.

Accounts Receivable

        We evaluate the collectability of accounts receivable balances based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations to us, a specific allowance against amounts due to us is recorded, and thereby reduces the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and our historical experience. If the financial condition of our

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customers deteriorates or if economic conditions worsen, additional allowances may be required in the future, which could have an adverse impact on our future operating results.

Inventories

        We value inventory at the lower of cost or market using the first-in, first-out (FIFO) method. Management assesses the recoverability of inventory based on types and levels of inventory held, forecasted demand and changes in technology. These assessments require management judgments and estimates, and valuation adjustments for excess and obsolete inventory may be recorded based on these assessments. We estimate excess and obsolescence exposures based upon assumptions about future demand, product transitions, and market conditions and record reserves to reduce inventories to their estimated net realizable value. The failure to accurately forecast demand may lead to additional excess and obsolete inventory and future charges.

Goodwill, Intangible Assets, and Other Long-Lived Assets

        Long-lived assets consist of goodwill, identifiable intangible assets, trademarks, patents and agreements and property, plant, and equipment. Intangible assets and property, plant, and equipment, excluding goodwill, are amortized using the straight-line method over their estimated useful life. We review long-lived assets and all intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Goodwill is also reviewed at least annually for impairment. Factors which we consider important and that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. We determine whether an impairment has occurred based on gross expected future cash flows and measure the amount of the impairment based on the related future discounted cash flows. The cash flow estimates used to determine impairment, if any, contain management's best estimates, using appropriate and customary assumptions and projections at the time. (See notes to consolidated financial statements.)

        The estimates of expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.

Revenue Recognition

        We recognize revenue when persuasive evidence of an arrangement exists, performance of our obligation is complete, our price to the buyer is fixed or determinable, and we are reasonably assured of collecting. This is typically at the time of shipment. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Revenue recognition involves judgments and assessments of expected returns, and the likelihood of nonpayment due to insolvent customers. We analyze various factors, including a review of specific customer contracts and shipment terms, historical experience, creditworthiness of customers and current market and economic conditions in determining when to recognize revenue. Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated income. Commissions are recognized when earned and payments are received from the manufacturers represented. Royalty revenue is recognized based on licensee production statements received from the authorized manufacturers. Billed shipping and handling fees are recorded as sales revenue with the associated costs recorded as costs of products and services sold.

Contingent Income Tax Liabilities

        We are subject to routine income tax audits that occur periodically in the normal course of business. Our contingent income tax liabilities are estimated based on the methodology prescribed in FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), which was adopted as of the beginning of fiscal 2008. FIN 48 prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Our liabilities related to uncertain tax positions require an assessment of the probability of the income-tax-related exposures and settlements and are influenced by our historical audit experiences with various state and federal taxing authorities as well as by current income tax trends. If circumstances change, we may be required to record adjustments that could be material to our reported financial condition and results of operations. See Note 7 to the Consolidated Financial Statements included in this Report for more information on FIN 48.

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Deferred Income Taxes

        We evaluate the need for a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Pension Benefits

        We sponsor a non-contributory defined benefit pension plan covering substantially all employees of certain divisions of the Company. In calculating our retirement plan obligations and related expense, we make various assumptions and estimates. These assumptions include discount rates, benefits earned, expected return on plan assets, mortality rates, and other factors. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension obligations and future expense.

        Effective December 1, 2008, the defined benefit pension plan was amended to include a soft freeze whereby any employee hired after the effective date of December 1, 2008 will not be admitted to the plan. The only exception relates to employees of the International Association of Machinists and Aerospace Workers Union. All participants who were previously admitted to the plan prior to the December 1, 2008 soft freeze will continue to accrue benefits as detailed in the plan agreements.

        We account for our pension plan following the requirements of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("FAS 158"). FAS 158 requires an employer to: (a) recognize in its statement of financial position the funded status of a benefit plan; (b) measure defined benefit plan assets and obligations as of the end of the employer's fiscal year (with limited exceptions); and (c) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise but are not recognized as components of net periodic benefit costs pursuant to prior existing guidance.

Impact of Inflation

        Inflation has not had a significant long-term impact on our earnings. In the event of significant inflation, our efforts to recover cost increases would be hampered as a result of the competitive nature of the industries in which we operate.

Forward-Looking Information

        From time to time, we may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, acquisition or consolidation strategies, anticipated sources of capital, research and development activities and similar matters. In fact, this Form 10-K (or any other periodic reporting documents required by the 1934 Act) may contain forward-looking statements reflecting our current views concerning potential or anticipated future events or developments, including our strategic goals for future fiscal periods. The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements. We caution investors that any forward-looking statements made by us are not guarantees of future performance and that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties which may affect the operations, performance, development and results of our business include, but are not limited to, the following: uncertainties relating to economic conditions; uncertainties relating to customer plans and commitments; the pricing and availability of equipment, materials and inventories; the impact of acquisitions on our business and results of operations; technological developments; performance issues with suppliers and subcontractors; our ability to renew existing credit facilities or to obtain new or additional financing as needed; economic growth; delays in testing of new products; rapid technology changes and the highly competitive environment in which we operate. These risks and uncertainties also include those risks outlined under Item 1A (Risk Factors) of this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

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