You should read the following discussion in conjunction with Management's Discussion and Analysis included in our 2008 Annual Report on Form 10-K. For a discussion of our base business calculations, see page 9 under the RESULTS OF OPERATIONS section below.

OVERVIEW

Financial Results

In a very difficult external environment, we continue to focus on the aspects of our business that are directly within our control. We have improved our pricing and purchasing discipline to increase gross margins, adjusted expenses commensurate with sales expectations and rebalanced inventories while ensuring excellent customer service.

Net sales for the seasonally slow first quarter decreased 18% compared to the first quarter of 2008. Base business sales declined 21% reflecting continued soft demand for pool and irrigation construction products, an 18% decrease in customer early buy purchases and deferred discretionary replacement product sales.

Gross profit as a percentage of net sales (gross margin) improved 120 basis points to 29.4% in the first quarter of 2009 from 28.2% in the first quarter of 2008. The increase in gross margin is primarily attributable to improved pricing management, the benefit resulting from pre-price increase inventory purchases in the second half of 2008 and favorable sales mix changes.

Selling and administrative expenses (operating expenses) decreased 9% in the first quarter of 2009 compared to the first quarter of 2008, with base business operating expenses 11% lower due primarily to the impact of cost control initiatives on payroll related and variable expenses.

Operating loss was $3.6 million in the first quarter of 2009 compared to operating income of $2.2 million in the same period in 2008. Interest expense decreased 34% compared to the first quarter of 2008 due to a lower weighted average effective interest rate between periods. Loss per share for the first quarter of 2009 was $0.13 per diluted share on a net loss of $6.2 million, compared to a loss of $0.07 per diluted share on a net loss of $3.2 million in the same period in 2008.

Financial Position and Liquidity

Total net receivables decreased 22% to $160.3 million at March 31, 2009 from $206.2 million at March 31, 2008 due primarily to the decrease in net sales and a shift toward more cash sales as a result of our tighter credit policies. Our allowance for doubtful accounts balance was $13.4 million at March 31, 2009, an increase of $4.0 million over March 31, 2008. We increased the allowance for doubtful accounts in the second half of 2008 to reflect an increase in our total past due receivable balances year over year. The allowance for doubtful accounts has decreased approximately $0.3 million from December 31, 2008 to March 31, 2009. Days sales outstanding (DSO), as calculated on a trailing twelve month basis, was 36.3 days at March 31, 2009 compared to 36.4 days at March 31, 2008.

Our inventory levels decreased 17% to $397.9 million as of March 31, 2009 compared to $476.8 million as of March 31, 2008. This decrease reflects the ongoing implementation of our inventory rebalancing efforts to reduce inventory levels across all product classes. Our inventory turns, as calculated on a trailing twelve month basis, have decreased to 3.1 times as of March 31, 2009 compared to 3.5 times as of March 31, 2008.

Total debt outstanding decreased to $381.2 million at March 31, 2009 compared to $396.1 million at March 31, 2008. Based on early payments we made in the past six months to take advantage of pre-price increase inventory purchases and early payment discounts offered by certain vendors, we expect to realize a comparative cash flow benefit in the second quarter and for the rest of the year.

Current Trends

Continuing adverse economic trends have significantly impacted our industry. These trends include a slowdown in the domestic housing market, with lower housing turnover, a sharp drop in new home construction, home value deflation in many markets and a significant tightening of consumer and commercial credit. Additionally, general economic conditions are weak, including increasing unemployment and declining Gross Domestic Product (GDP). Some of the factors that help mitigate the impact of these negative trends on our business include the following:

· the majority of our business is driven by the ongoing maintenance and repair of existing pools and landscaped areas, with under 20% of our sales and gross profits tied to new pool or irrigation construction in 2008 (as our sales related to new construction activity have declined, the proportion of our net sales represented by maintenance, repair and replacement (MRR) products has increased to over 80%); and

· we believe our service-oriented model helps us gain market share.

Despite these mitigating factors, the negative trends noted above have significantly impacted a number of our key markets, including California, Florida and Arizona, with a more recent adverse impact in Texas and other states. We estimate that these trends resulted in the following decreases in new pool construction in the United States between 2005 and 2008:

2008 2007 2006 Units (60,000 ) (50,000 ) (10,000 ) % (40 )% (25 )% (5 )%

We believe these decreases represent the first three year decline in new pool construction in our industry history. Since these trends worsened from 2007 through the first quarter of 2009, they had a more pronounced impact on our results for the year ended 2008 and the first quarter of 2009. Given the current economic conditions, we believe these trends will continue through 2009. This may result in an even greater impact on new pool construction and consumer spending on outdoor living spaces, which could negatively impact our sales and earnings.

Outlook

We believe the declines in the housing market, consumer credit and general economic conditions have combined to make 2009 an extremely challenging year. Since maintenance and repair product sales are more seasonally weighted to our most important second and third quarters, we expect that the impact of these sales will partially mitigate much lower new construction and deferred replacement product sales. As noted in our first quarter 2009 earnings release on April 23, 2009, we believe that Street earnings consensus at that time of $0.95 per diluted share for fiscal 2009 is reasonable.

The forward-looking statements in this Outlook section are subject to significant risks and uncertainties, including changes in the economy and the housing market, the sensitivity of our business to weather conditions, our ability to maintain favorable relationships with suppliers and manufacturers, competition from other leisure product alternatives and mass merchants, and other risks detailed in Part II - Item 1A "Risk Factors" and our "Cautionary Statement for Purpose of the 'Safe Harbor' Provisions of the Private Securities Litigation Reform Act of 1995".

RESULTS OF OPERATIONS

As of March 31, 2009, we conducted operations through 288 sales centers in North
America and Europe.

The following table presents information derived from the Consolidated
Statements of Income (Loss) expressed as a percentage of net sales.

                                                     Three Months Ended
                                                          March 31,
                                                      2009         2008
          Net sales                                  100.0 %       100.0 %
          Cost of sales                               70.6          71.8
          Gross profit                                29.4          28.2
          Selling and administrative expenses         30.7          27.5
          Operating income (loss)                     (1.3 )         0.6
          Interest expense, net                        1.2           1.5
          Loss before income taxes and equity loss    (2.5 )        (0.8 )

Note: Due to rounding, percentages may not add to operating income (loss) or loss before income taxes and equity loss.

Our discussion of consolidated operating results includes the operating results from acquisitions in 2008, 2007 and 2006. We accounted for these acquisitions using the purchase method of accounting, and we have included the results of operations in our consolidated results since the respective acquisition dates.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

The following table breaks out our consolidated results into the base business
component and the excluded components (sales centers excluded from base
business):

   (Unaudited)              Base Business             Excluded                  Total
   (In thousands)            Three Months           Three Months             Three Months
                                Ended                   Ended                   Ended
                              March 31,               March 31,               March 31,
                         2009         2008        2009        2008        2009         2008
   Net sales          $ 253,928    $ 321,281   $ 22,698    $ 16,934    $ 276,626    $ 338,215

   Gross profit          74,909       90,483      6,284       4,871       81,193       95,354
   Gross margin            29.5 %       28.2 %     27.7 %      28.8 %       29.4 %       28.2 %

   Operating expenses    77,847       87,475      6,992       5,682       84,839       93,157
   Expenses as a % of      30.7         27.2       30.8        33.6
   net sales                    %            %          %           %       30.7 %       27.5 %

   Operating income      (2,938        3,008       (708        (811
   (loss)                       )                       )           )     (3,646 )      2,197
   Operating margin        (1.2 )%       0.9 %     (3.1 )%     (4.8 )%      (1.3 )%       0.6 %

We exclude the following sales centers from our base business results for a period of 15 months (parenthetical numbers for each category indicate the number of sales centers excluded as of March 31, 2009):

· acquired sales centers (10, net of consolidations -­ see table below);

· existing sales centers consolidated with acquired sales centers (7);

· closed sales centers (4);

· consolidated sales centers in cases where we do not expect to maintain the majority of the existing business (1); and

· sales centers opened in new markets (0).

We generally allocate overhead expenses to excluded sales centers on the basis of their net sales as a percentage of total net sales. After 15 months of operations, we include acquired and new market sales centers in the base business calculation including the comparative prior year period.

Since we divested our pool liner manufacturing operation in France in April 2008, we have excluded these operations from base business for the comparative three month period ended March 31, 2008.

We have excluded the following acquisitions from base business for the periods identified:

                                           Net
                                          Sales
     Acquired            Acquisition     Centers               Period
                            Date        Acquired              Excluded
     Proplas            November 2008       0       January 2009 - March 2009
     Plasticos, S.L.
     National Pool      March 2008          9       January 2009 - March 2009 and
     Tile (NPT)                                     March 2008
     Canswim Pools      March 2008          1       January 2009 - March 2009 and
                                                    March 2008

The number of sales centers did not change during the quarter ended March 31, 2009.

Net Sales

The new pool and irrigation construction markets continue to face unprecedented adverse conditions created by the combination of significant declines in the real estate and mortgage-backed financing markets. Coupled with the current severely depressed economic environment, these external factors have placed considerable pressure on our top line results. As a result, our seasonally slow first quarter 2009 sales were negatively impacted as construction activities remained depressed, fewer customers participated in early buy purchase programs and consumers continued to defer discretionary replacement purchases.

Base business sales for the first quarter of 2009 decreased 21% compared to the first quarter of 2008. This includes a 19% decline on the swimming pool side of the business and a 35% decline on the irrigation side of the business, which is more heavily weighted toward new construction and discretionary product sales.

The overall decrease in net sales was partially offset by increases due to the following:

· inflationary price increases that we passed through the supply chain;

· approximately $9.0 million of increased sales for new drains and related safety products as a result of the Virginia Graeme Baker Pool and Spa Safety Act, which became effective in December 2008 and imposes mandatory federal requirements on the manufacture, distribution and/or sale of suction entrapment avoidance devices such as safety drain covers, public pool drain covers and public pool drain systems; and

· approximately $7.0 million in sales related to our 2008 acquisitions.

Gross Profit

                                   Three Months Ended
                                       March 31,
                (in millions)      2009          2008          Change
                Gross profit     $    81.2     $    95.4   $ (14.2 ) (15 )%
                Gross margin          29.4  %       28.2 %

Despite the tough competitive pricing environment, gross margin increased 120 basis points compared to the first quarter of 2008. The increase in gross margin is primarily attributable to improved pricing and purchasing discipline. Favorable impacts compared to the same period in 2008 included the following (listed in order of estimated magnitude):

· increased sales of preferred vendor and Pool Corporation private label products;

· benefits resulting from pre-price increase inventory purchases made in the second half of 2008;

· a shift in sales mix to products in the higher margin maintenance and repair market; and

· higher recognized purchase discounts due to special payment terms offered by certain vendors for early payments we made in the first quarter of 2009 related to 2008 early buy purchases (benefit of approximately 20 basis points).

Operating Expenses

                                            Three Months Ended
                                                March 31,
  (in millions)                            2009             2008             Change
  Operating expenses                   $        84.8     $      93.2    $ (8.4 )    (9 )%
  Operating expenses as a                             %
  percentage of net sales                       30.7            27.5 %

The decrease in operating expenses reflects an 11% decline in base business operating expenses compared to the first quarter of 2008. This decrease is due primarily to the impact of our cost control initiatives including lower payroll related, variable and discretionary expenses. As of March 31, 2009, total headcount decreased 3% since December 31, 2008 and 10% since March 31, 2008, driving a 9% decline in total labor and related costs. Delivery costs decreased 21% quarter over quarter, which is in line with our decrease in net sales.

The decrease in operating expenses was partially offset by the impact of our acquired sales centers, which had approximately $2.0 million in operating expenses during the first quarter. Total operating expenses as a percentage of net sales increased between periods due to the decrease in net sales.

Interest Expense

Interest expense decreased 34% between periods as a result of our lower weighted average effective interest rate for the period. The weighted average effective interest rate decreased to 3.3% in the first quarter of 2009 from 5.2% in the same period in 2008. Average debt outstanding levels for the first quarter of 2009 were consistent with those in the first quarter of 2008.

Income Taxes

The income tax benefit was greater in the first quarter of 2009 compared to the first quarter of 2008 due to the increase in the loss before income taxes and equity loss. Our effective income tax rate was 39.29% for the three months ended March 31, 2009 and 38.50% for the three months ended March 31, 2008. The increase in the effective income tax rate reflects a change in estimated annual losses from certain foreign operations.

Net Loss and Loss Per Share

Net loss increased to $6.2 million in the first quarter of 2009 from $3.2 million in the first quarter of 2008. This increase includes a $0.5 million increase in net loss from our equity investment in Latham Acquisition Corporation. Our net loss was $0.13 per diluted share for the first quarter of 2009 compared to a net loss of $0.07 per diluted share for the same period of 2008.

Seasonality and Quarterly Fluctuations

Our business is highly seasonal. In general, sales and operating income are highest during the second and third quarters, which represent the peak months of both swimming pool use and installation and landscape installations and maintenance. Sales are substantially lower during the first and fourth quarters when we may incur net losses.

We typically experience a build-up of product inventories and accounts payable during the winter months in anticipation of the peak selling season. Excluding borrowings to finance acquisitions and share repurchases, our peak borrowing usually occurs during the second quarter, primarily because extended payment terms offered by our suppliers typically are payable in April, May and June, while our peak accounts receivable collections typically occur in June, July and August. We believe that our debt levels will peak a little earlier in 2009 based on early payments we made in the past six months to take advantage of pre-price increase inventory purchases and early payment discounts offered by certain vendors.

The following table presents certain unaudited quarterly data for the first quarter of 2009, the four quarters of 2008 and the second, third and fourth quarters of 2007. We have included income statement and balance sheet data for the most recent eight quarters to allow for a meaningful comparison of the seasonal fluctuations in these amounts. In our opinion, this information reflects all normal and recurring adjustments considered necessary for a fair presentation of this data. Due to the seasonal nature of our industry, the results of any one or more quarters are not necessarily an accurate indication of results for an entire fiscal year or of continuing trends.