You should read the following discussion in conjunction with Management's Discussion and Analysis included in our fiscal 2008 Annual Report on Form 10-K. Unless otherwise specifically indicated, all references to "2008" refer to the three months (first quarter) ended December 31, 2008 and all references to "2007" refer to the three months (first quarter) ended December 31, 2007. Certain tabular information may not foot due to rounding.

We are one of the largest distributors of residential and non-residential roofing materials in the United States and Canada. We are also a distributor of other complementary building products, including siding, windows, specialty lumber products and waterproofing systems for residential and non-residential building exteriors. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of contractors and, to a lesser extent, general contractors, retailers and building materials suppliers.

We distribute up to 10,000 SKUs through 171 branches in the United States and Canada. We had 2,372 employees as of December 31, 2008, including our sales and marketing team of 945 employees.

In fiscal year 2008, approximately 94% of our net sales were in the United States. We stock one of the most extensive assortments of high-quality branded products in the industry, enabling us to deliver products to our customers on a timely basis.

Execution of the operating plan at each of our branches drives our financial results. Revenues are impacted by the relative strength of the residential and non-residential roofing markets we serve. We allow each of our branches to develop its own marketing plan and mix of products based upon its local market. We differentiate ourselves from the competition by providing customer services, including job site delivery, tapered insulation layouts and design and metal fabrication, and by providing credit. We consider customer relations and our employees' knowledge of roofing and exterior building materials to be very important to our ability to increase customer loyalty and maintain customer satisfaction. We invest significant resources in training our employees in sales techniques, management skills and product knowledge. Although we consider these attributes important drivers of our business, we continually pay close attention to controlling operating costs.

Our growth strategy includes both internal growth (opening branches, growing sales with existing customers, adding new customers and introducing new products) and acquisition growth. Our main acquisition strategy is to target market leaders in geographic areas that we do not service. Our April 2007 acquisition of North Coast Commercial Roofing Systems, Inc. ("North Coast") is one example of this approach. North Coast is a distributor of commercial roofing systems and related accessories that operated 16 branches in eight states in the Midwest and Northeast. North Coast had minimal branch overlap with our existing operations at the time of the acquisition. In addition, we also acquire smaller companies to supplement branch openings within existing markets. Our August 2006 acquisition of Roof Depot, Inc. ("Roof Depot"), which operated two branches and was integrated into our Midwest region, is one example of such an acquisition.

  Results of Operations

The following table shows, for the periods indicated, information derived from
our consolidated statements of operations expressed as a percentage of net sales
for the periods presented. Percentages may not foot due to rounding.

                                          Three Months Ended December 31,
                                           2008                     2007

        Net sales                               100.0 %                  100.0 %
        Cost of products sold                    75.0                     77.0

        Gross profit                             25.0                     23.0

        Operating expenses                       16.9                     19.1

        Income from operations                    8.1                      4.0
        Interest expense                         (1.3 )                   (1.8 )

        Income before income taxes                6.8                      2.2
        Income tax expense                       (2.8 )                   (0.9 )

        Net income                                4.0 %                    1.3 %

In managing our business, we consider all growth, including the opening of new branches, to be internal (organic) growth unless it results from an acquisition. When we refer to growth in existing markets or internal growth in our discussion and analysis of financial condition and results of operations, we include growth from existing and newly opened branches but exclude growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period. At December 31, 2008, we had a total of 171 branches in operation, all of which are included in our existing market calculations.

Three Months Ended December 31, 2008 ("2008") Compared to the Three Months Ended December 31, 2007 ("2007")

Net Sales

Consolidated net sales increased $64.9 million, or 16.3%, to $463.3 million in 2008 from $398.4 million in 2007. We attribute the sales increase primarily to the following factors:

· higher year-over-year prices, especially in residential roofing products; and
· strong re-roofing activity in the areas affected by Hurricane Ike;

partially offset by the negative impact of:
· weakness in non-residential roofing activity, partially due to early onset of winter conditions in our markets that have the largest concentration of commercial business;
· continued weakness in new residential roofing activity in most markets;
· continued weak complementary product sales in most markets; and
· seven fewer branches than in 2007.

We closed four branches in this year's first quarter, while we opened one branch and closed one branch during last year's first quarter.

We estimate inflation contributed approximately 75-85% of our growth for the quarter. In addition, we had 62 business days in 2008 compared to 61 in 2007, which we believe increased our sales by approximately 1.9%. Our product group sales were as follows:

For the Three Months Ended

                            December 31, 2008           December 31, 2007
                           Sales          Mix          Sales          Mix                Change
                                                     (dollars in thousands)

Residential roofing
products                 $  234,462         50.6 %   $  148,019         37.2 %   $  86,443         58.4 %
Non-residential
roofing products            164,736         35.6 %      172,788         43.4 %      (8,052 )       -4.7
Complementary building
products                     64,131         13.8 %       77,589         19.5 %     (13,458 )      -17.3

                         $  463,329        100.0 %   $  398,396        100.0 %   $  64,933         16.3 %

Gross Profit

For the Three Months Ended

                         December 31,       December 31,
                             2008               2007                  Change
                                            (dollars in millions)

          Gross Profit   $       116.0     $         91.7     $ 24.3            26.5 %

          Gross Margin            25.0 %             23.0 %            2.0%

Our gross profit increased $24.3 million or 26.5% in 2008, while our gross margin increased to 25.0% in 2008 from 23.0% in 2007. The margin rate increase was largely the result of a product mix shift to more residential roofing products, which have substantially higher gross margins than the more competitive non-residential market. In addition, the benefit of lower weighted-average costs of residential roofing products in comparison to current prices of those products in the marketplace continued from the fourth quarter of fiscal 2008 into the first quarter of this year. Gross margins in non-residential roofing and complementary products, excluding vendor incentives, which represent our invoiced gross margin, increased in 2008 compared to 2007, although to a lesser extent than our residential roofing gross margins. We do not expect the weighted-average residential cost effect to continue much beyond the first quarter, and expect future overall gross margin to range from 23-24.5%, dependant upon product mix.

Operating Expenses

For the Three Months Ended

                              December 31,       December 31,
                                  2008               2007                      Change
                                                     (dollars in millions)

Operating Expenses           $         78.3     $         75.9     $     2.4                   3.2 %

Operating Expenses as a %
of Sales                               16.9 %             19.1 %                 -2.2%

Our operating expenses increased by $2.4 million or 3.2% to $78.3 million in 2008 from $75.9 million in 2007. The following factors were the leading causes of our higher operating expenses:

· an increase of $2.7 million in payroll and related costs primarily from higher incentive-based pay accruals and less favorable medical insurance claims experience, partially offset by the benefit from a lower headcount;
· an increase of $0.7 million in warehouse expenses, mostly due to costs associated with the closing of the four branches; and
· increases in credit card fees (associated with the higher sales) and certain administrative expenses totaling $0.7 million;

partially offset by:
· savings of $0.5 million in transportation expenses, primarily from lower fuel costs; and
· reduced depreciation and amortization expense of $1.2 million due to lower amortization of intangible assets and very low capital expenditures in fiscal 2008.

In 2008, we expensed a total of $3.2 million for the amortization of intangible assets recorded under purchase accounting compared to $3.9 million in 2007. Our operating expenses as a percentage of net sales decreased to 16.9% in 2008 from 19.1% in 2007 as we were able to control our variable costs related to the increased sales and better leverage our fixed costs.

Interest Expense

Interest expense decreased $0.9 million to $6.1 million in 2008 from $7.0 million in 2007. This decrease was primarily due to a paydown of debt and lower average interest rates, which affected the unhedged portion of our variable-rate debt.

Income Taxes

Income tax expense of $12.9 million was recorded in 2008, an effective tax rate of 40.9%, compared to $3.5 million in 2007, an effective tax rate of 40.2%. The slight increase in the effective rate reflects changes in allocations of taxable income and losses among the states in which we are located.

In general, sales and net income are highest during our first, third and fourth fiscal quarters, which represent the peak months of construction and reroofing, especially in our branches in the northeastern U.S. and in Canada. Our sales are substantially lower during the second quarter, when we historically have incurred low net income levels or net losses.

We generally experience an increase in inventory, accounts receivable and accounts payable during the first, third and fourth quarters of the year as a result of the seasonality of our business. Our peak borrowing level generally occurs during the third quarter, primarily because dated accounts payable offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur from June through November.

We generally experience a slowing of collections of our accounts receivable during our second quarter, mainly due to the inability of some of our customers to conduct their businesses effectively in inclement weather in certain of our regions. We continue to attempt to collect those receivables, which require payment under our standard terms. We do not provide any concessions to our customers during this quarter of the year, although we may take advantage of seasonal incentives from our vendors. Also during the second quarter, we generally experience our lowest availability under our senior secured credit facilities, which are asset-based lending facilities.

Certain Quarterly Financial Data

    The following table sets forth certain unaudited quarterly data for fiscal
years 2009 (ending September 30, 2009) and 2008 which, in the opinion of
management, reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of this data. Results of any one or
more quarters are not necessarily indicative of results for an entire fiscal
year or of continuing trends. Totals may not foot due to rounding.

                            Fiscal year 2009                        Fiscal year 2008

                                 Qtr 1              Qtr 1         Qtr 2         Qtr 3         Qtr 4
                                          (dollars in millions, except per share data)
                                                           (unaudited)
Net sales                  $            463.3     $   398.4     $   304.3     $   514.6     $    567.2
Gross profit                            116.0          91.7          68.4         120.2          139.7
Income (loss) from
operations                               37.7          15.8          (6.9 )        36.9           48.9
Net income (loss)          $             18.6     $     5.2     $    (8.1 )   $    18.3     $     24.9

Earnings (loss) per
share - basic              $             0.42     $    0.12     $   (0.18 )   $    0.41     $     0.56
Earnings (loss) per
share - fully diluted      $             0.41     $    0.12     $   (0.18 )   $    0.41     $     0.55

Quarterly sales as % of
year's sales                                           22.3 %        17.1 %        28.8 %         31.8 %
Quarterly gross profit
as % of year's gross
profit                                                 21.8 %        16.3 %        28.6 %         33.3 %
Quarterly income (loss)
from operations as % of
year's income (loss)
from operations                                        16.7 %        -7.3 %        39.0 %         51.6 %

The calculations of the net loss per share for the second quarter of fiscal 2008 did not include the effect of stock options since the impact would have been anti-dilutive.

Liquidity and Capital Resources

We had cash and cash equivalents of $22.1 million at December 31, 2008 compared to $7.3 million at December 31, 2007 and $26.0 million at September 30, 2008. Our net working capital was $294.1 million at December 31, 2008 compared to $227.0 million at December 31, 2007 and $274.8 million at September 30, 2008.

2008 Compared to 2007

Our net cash provided by operating activities was $5.0 million for 2008 compared to $2.8 million for 2007. Accounts receivable and inventories decreased in 2008 by $84.2 and 19.2 million, respectively, primarily due to normal seasonal declines. The favorable impact from those decreases were more than offset by a decrease of $122.1 million in accounts payable and accrued expenses due principally to a normal seasonal decline and the payment of previously accrued income taxes, and somewhat from certain accelerated payments to vendors. The number of days outstanding for accounts receivable, based upon first quarter sales, decreased in 2008 from 2007 mainly from the impact of stronger sales. Inventory turns were consistent in both quarters.

Net cash used in investing activities increased by $0.9 million in 2008 to $2.0 million from $1.1 million in 2007, due to increased capital spending. We are closely managing our capital expenditures during these challenging economic times and we expect fiscal 2009 capital expenditures to total 0.5% to 0.7% of net sales.

Net cash used by financing activities was $6.8 million in 2008 compared to $1.6 million in 2007. These quarterly amounts primarily reflected repayments under our revolving lines of credit and term loan. As discussed further below, there is a $7 million accelerated payment due under the term loan in May 2009.

Capital Resources

Our principal source of liquidity at December 31, 2008 was our cash and cash equivalents of $22.1 million and our available borrowings of $148.7 million under revolving lines of credit, subject to compliance with the maximum consolidated leverage ratio below. Our borrowing base availability is determined primarily by trade accounts receivable, less outstanding borrowings and letters of credit. Borrowings outstanding under the revolving lines of credit in the accompanying balance sheets have been classified as short-term debt since there were no current expectations of a minimum level of outstanding revolver borrowings in the following twelve months.

Liquidity is defined as the current amount of readily available cash and the ability to generate adequate amounts of cash to meet the current needs for cash. We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business.

Significant factors which could affect future liquidity include the following:

· the adequacy of available bank lines of credit;

· the ability to attract long-term capital with satisfactory terms;

· cash flows generated from operating activities;

· acquisitions; and

· capital expenditures.

Our primary capital needs are for working capital obligations and other general corporate purposes, including acquisitions and capital expenditures. Our primary sources of working capital are cash from operations and cash equivalents supplemented by bank borrowings. In the past, we have financed acquisitions initially through increased bank borrowings, the issuance of common stock and other borrowings. We then repay any such borrowings with cash flows from operations. We have funded most of our past capital expenditures through increased bank borrowings, including equipment financing, or through capital leases and then have reduced these obligations with cash flows from operations.

We believe we have adequate current liquidity and availability of capital to fund our present operations, meet our commitments on our existing debt and fund anticipated growth, including expansion in existing and targeted market areas. We seek potential acquisitions from time to time and hold discussions with certain acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a sufficient base for obtaining additional financing resources at reasonable rates and terms, as we have in the past. We may also issue additional shares of common stock to raise funds, which we did in December 2005, or we may issue preferred stock.

Indebtedness

We currently have the following credit facilities:

· a senior secured credit facility in the U.S.; and

· a Canadian senior secured credit facility.

Senior Secured Credit Facilities

On November 2, 2006, we entered into an amended and restated seven-year $500 million U.S. senior secured credit facility and a C$15 million senior secured Canadian credit facility with GE Antares Capital ("GE Antares") and a syndicate of other lenders (combined, the "Credit Facility"). The Credit Facility refinanced the prior $370 million credit facilities that also were provided through GE Antares. The Credit Facility provides us with lower interest rates and available funds for future acquisitions and ongoing working capital requirements. In addition, the Credit Facility increased the allowable total equipment financing and/or capital lease financing to $35 million. The Credit Facility provides for a cash receipts lock-box arrangement that gives us sole control over the funds in lock-box accounts, unless excess availability is less than $10 million or an event of default occurs, in which case the senior secured lenders would have the right to take control over such funds and to apply such funds to repayment of the senior debt.

The Credit Facility consists of a U.S. revolving credit facility of $150 million (the "US Revolver"), which includes a sub-facility of $20 million for letters of credit, and provided an initial $350 million term loan (the "Term Loan"). The Credit Facility also includes a C$15 million senior secured revolving credit facility provided by GE Canada Finance Holding Company (the "Canada Revolver"). There was a combined $148.7 million available for revolver borrowings at December 31, 2008, subject to compliance with the maximum consolidated leverage ratio below, with $0.1 million outstanding under the US Revolver that carried an interest rate of 3.25%. Borrowings outstanding under the revolving lines of credit in the accompanying balance sheets were classified as short-term debt since there were no current expectations of a minimum level of outstanding revolver borrowings in the following twelve months. There were $4.3, $6.5 and $4.3 million of outstanding standby letters of credit at December 31, 2008, December 31, 2007 and September 30, 2008, respectively. The Term Loan requires amortization of 1% per year, payable in quarterly installments of approximately $0.9 million, and the remainder is due in 2013. The Credit Facility may also be expanded by up to an additional $200 million under certain conditions. There are mandatory prepayments under the Credit Facility under certain conditions, including the following cash flow condition:

Excess Cash Flow

On May 15 of each fiscal year, commencing on May 15, 2008, we must pay an amount equal to 50% of the Excess Cash Flow (as defined in the Credit Facility) for the prior fiscal year, not to exceed $7.0 million with respect to any fiscal year. Based on our results for fiscal year 2008, a payment of $7.0 million is due in May 2009.

Interest

Interest on borrowings under the U.S. credit facility is payable at our election at either of the following rates:

· the base rate (that is the higher of (a) the base rate for corporate loans quoted in The Wall Street Journal or (b) the Federal Reserve overnight rate plus 1/2 of 1%) plus a margin of 0.75% for the Term Loan.

· the current LIBOR Rate plus a margin of 1.00% (for U.S. Revolver loans) or 2.00% (for Term Loan).

Interest under the Canadian credit facility is payable at our election at either of the following rates:

· an index rate (that is the higher of (1) the Canadian prime rate as quoted in The Globe and Mail and (2) the 30-day BA Rate plus 0.75%), or

· the BA rate as described in the Canadian facility plus 1.00%.

The US Revolver currently carries interest rates of the base rate plus 0.75% (3.25% at December 31, 2008)), while the Canada revolver carries an interest rate of the Canadian prime rate plus 0.75%, and the Term Loan carries an interest rate of LIBOR plus 2% (6.05% and 2.47% for two LIBOR arrangements under the Term Loan at December 31, 2008). Unused fees on the revolving credit facilities are 0.25% per annum. Availability under the revolving credit facilities is limited to 85% of eligible accounts receivable, increasing to 90% from January through April of each year.

Financial covenants, which apply only to the Term Loan, are limited to a leverage ratio and a yearly capital expenditure limitation as follows:

Maximum Consolidated Leverage Ratio

On the last day of each fiscal quarter, our Consolidated Leverage Ratio, as defined, must not be greater than 4.00:1.0. At December 31, 2008, this ratio was 2.25:1.

Capital Expenditures

We cannot incur aggregate Capital Expenditures, as defined, in excess of three percent (3.00%) of consolidated gross revenue for any fiscal year.

As of December 31, 2008, we were in compliance with these covenants. Substantially all of our assets, including the capital stock and assets of wholly-owned subsidiaries secure obligations under the Credit Facility.

Equipment Financing Facilities

The Company had two equipment financing facilities which allowed for the financing of purchased transportation and material handling equipment. There was $23.2 million of equipment financing loans outstanding under these facilities at December 31, 2008, with fixed interest rates ranging from 5.5% to 7.4%.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

Our disclosure and analysis in this report contains forward-looking information that involves risks and uncertainties. Our forward-looking statements express our current expectations or forecasts of possible future results or events, including projections of future performance, statements of management's plans and objectives, future contracts, and forecasts of trends and other matters. You can identify these statements by the fact that they do not relate strictly to historic or current facts and often use words such as "anticipate," "estimate," "expect," "believe," "will likely result," "outlook," "project" and other words and expressions of similar meaning. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors, which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.

Certain factors that may affect our business and could cause actual results to differ materially from those expressed in any forward-looking statements include those set forth under the heading "Risk Factors" in our Form 10-K for the fiscal year ended September 30, 2008.