Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The Company may from time to time make written or oral "forward-looking statements" including statements contained in this report and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements of the Company's plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, in addition to others not listed, could cause the Company's actual results to differ materially from those expressed in forward looking statements: the strength of the domestic and local economies in which the Company conducts operations, the impact of current uncertainties in global economic conditions and the ongoing financial crisis affecting the domestic and foreign banking system and financial markets, including the impact on the Company's suppliers and customers, changes in client needs and consumer spending habits, the impact of competition and technological change on the Company, the Company's ability to manage its growth effectively, including its ability to successfully integrate any business which it might acquire, and currency fluctuations. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Results of Operations

Net Sales

Consolidated net sales for the three months ended September 30, 2008 were $19,158,000 compared with $17,081,000 in the same period in 2007, a 12% increase (11% at constant currency). Consolidated net sales for the nine months ended September 30, 2008 were $56,135,000, compared with $48,321,000 for the same period in 2007, a 16% increase (14% at constant currency). Net sales for the three and nine months ended September 30, 2008 in the U.S. segment increased 14% and 19%, respectively, as compared to the similar periods in 2007, primarily as a result of market share gains in all channels of distribution and market acceptance of new anti-microbial school scissors, rulers, and math kits and iPoint pencil sharpeners. Net sales in Canada for the three and nine months ended September 30, 2008 increased by 1% and 3% in U.S. dollars, as compared to the similar periods in 2007, but declined 0% and 5% in local currency, primarily due to soft demand in the overall office products market. European net sales for the three and nine months ended September 30, 2008 increased 8% and 14% in U.S. dollars, as compared to the similar periods in 2007. In local currency, European net sales declined 2% for the three months ended September 30, 2008 and increased 1% for the nine months ended September 30, 2008, as compared to the similar periods in 2007.

Traditionally, the Company's sales are stronger in the second and third quarters, and weaker in the first and fourth quarters of the fiscal year, due to the seasonal nature of the back-to-school market.

Gross Profit

Gross profit for the three months ended September 30, 2008 was $7,870,000 (41.1% of net sales) compared to $7,381,000 (43.2% of net sales) for the same period in 2007. Gross profit for the nine months ended September 30, 2008 was $22,774,000 (40.6% of net sales) compared to $20,694,000 (42.8% of net sales) in the same period in 2007. The gross margin declines for the three and nine months ended September 30, 2008 were primarily due to increased costs of material, labor and energy, as well as the appreciation of the Chinese currency against the U.S. dollar. Also, during the second and third quarters of 2008 the Company gained additional market share in the highly competitive back to school market which reduced gross margins due to the highly competitive nature of that market.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the three months ended September 30, 2008 were $5,650,000 (29.5% of net sales) compared with $5,229,000 (30.6% of net sales) for the same period of 2007, an increase of $421,000. SG&A expenses for the nine months ended September 30, 2008 were $16,690,000 (29.7% of net sales) compared with $14,822,000 (30.7% of net sales) in the comparable period of 2007, an increase of $1,868,000. SG&A expenses increased for the three and nine months ended September 30, 2008 primarily as a result of the addition of sales, marketing, logistics and quality control personnel as well as incrementally higher freight costs and sales commissions associated with higher sales.

Operating Income

Operating income for the three months ended September 30, 2008 was $2,219,000 compared with $2,152,000 in the same period of 2007, an increase of $33,000 or 1.5%. Operating income for the nine months ended September 30, 2008 was $6,084,000 compared to $5,872,000 in the same period of 2007.

Interest Expense

Interest expense for the three months ended September 30, 2008 was $120,000, compared with $208,000 for the same period of 2007, an $88,000 decrease. Interest expense for the nine months ended September 30, 2008 was $306,000, as compared to $519,000 for the same period in 2007, a $213,000 decrease. The decrease in interest expense for both the three and nine months ended September 30, 2008 was primarily the result of lower interest rates under the Company's revolving credit facility, partially offset by a higher average outstanding debt balance.

Other (Expense) Income, Net

Net other expense was $138,000 in the three months ended September 30, 2008, as compared to other income of $91,000 in the same period of 2007. Net other income was $23,000 in the first nine months of 2008, compared to $77,000 in the first nine months of 2007. The change in other (expense) income, net for the three months ended September 30, 2008 was primarily due to losses from foreign currency transactions. The decrease in other (expense) income, net for the nine months ended September 30, 2008 was primarily related to lower gains from foreign currency transactions.

Income Taxes

The effective tax rate for the three months ended September 30, 2008 was 31%, compared to 36% in the same period of 2007. The effective tax rate for the nine months ended September 30, 2008 was 34% compared to 36% in the same period of 2007. The decrease in the effective tax rate for the three and nine months ended September 30, 2008 is primarily related to a higher proportion of earnings in a foreign tax jurisdiction with a lower tax rate.

Financial Condition

Liquidity and Capital Resources

The Company's working capital, current ratio and long-term debt to equity ratio
follow:

(000's omitted from dollar amounts)                  September 30, 2008    December 31, 2007
                                                     ------------------    -----------------
   Working capital                                      $    34,515             $    29,326
   Current ratio                                               5.21                    4.44
   Long term debt to equity ratio                              51.0%                   44.0%

During the first nine months of 2008, total debt outstanding under the Company's Modified Loan Agreement, (referred to below) increased by $2,812,000 compared to total debt at December 31, 2007, principally due to an increase in borrowings for inventory and accounts receivables for the back to school season as well as share repurchases, partially offset by earnings. As of September 30, 2008, $12,910,000 was outstanding and $7,090,000 was available for borrowing under the Modified Loan Agreement.

On June 23, 2008, the Company modified its revolving loan agreement (the "Modified Loan Agreement") with Wachovia Bank. The Modified Loan Agreement amends certain provisions of the original revolving loan agreement. The amendments include (a) an increase in the maximum borrowing amount from $15 million to $20 million; (b) an extension of the maturity date of the loan from June 30, 2009 to June 30, 2010; (c) a decrease in the interest rate to LIBOR plus 7/8% (from LIBOR plus 1.0%) and (d) modification of certain covenant restrictions. Funds borrowed under the Modified Loan Agreement are used for working capital, general operating expenses, share repurchases and certain other purposes.

Cash expected to be generated from operating activities, together with funds available under the Modified Loan Agreement are expected, under current conditions, to be sufficient to finance the Company's planned operations over the next twelve months. However, the recent financial crisis affecting the domestic and foreign banking systems and financial markets, and the going concern threats to investment banks and other financial institutions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit and equity markets. There could be a number of follow on effects from the credit crisis on the Company's business, including weakening or insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles (GAAP) and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands financial statement disclosures about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) 157-2 which delayed the effective date of SFAS No. 157 for one year, for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 and FSP 157-2 are effective for financial statements issued for fiscal years beginning after November 15, 2007. We will elect a partial deferral of SFAS No. 157 under the provisions of FSP 157-2 related to the measurement of fair value used when evaluating long-lived assets for impairment and valuing asset retirement obligations. The impact of partially adopting SFAS No. 157 effective January 1, 2008 was not material to our financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS No. 159") which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. This statement is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. The Company chose not to adopt these fair value provisions.