##### Table of Contents





United States
    Securities and Exchange Commission
    Washington, D.C. 20549
  FORM 10-K
  þ
   December 31, 2008
   o
   Katy Industries, Inc.
   Delaware

75-1277589(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)305 Rock Industrial Park Drive, Bridgeton, Missouri
    (Address of Principal Executive Offices)

63044
    (Zip Code)   (314) 656-4321
          o þ
   o þ
   þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer o

Smaller reporting
    Company þ(Do not check if a smaller reporting
    company)   Rule 12b-2 o þ
      *
    
    Calculated by excluding all shares held by executive officers
    and directors of the registrant without conceding that all such
    persons are affiliates of the registrant for
    purposes of federal securities laws.  DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K Form 10-K.




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##### 





TABLE
    OF CONTENTS
   
 PART IItem 1. BUSINESS


2Item 1A. RISK FACTORS


5Item 1B. UNRESOLVED STAFF COMMENTS


11Item 2. PROPERTIES


12Item 3. LEGAL PROCEEDINGS


12Item 4. SUBMISSION OF MATTERS TO A VOTE OF
    SECURITY HOLDERS


12PART IIItem 5. MARKET FOR REGISTRANTS COMMON
    EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
    EQUITY SECURITIES


13Item 6. SELECTED FINANCIAL DATA


14Item 7. MANAGEMENTS DISCUSSION AND
    ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


15Item 7A. QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK


30Item 8. FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA


31Item 9. CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


68Item 9A. CONTROLS AND PROCEDURES


68Item 9B. OTHER INFORMATION


68Part IIIItem 10. DIRECTORS, EXECUTIVE OFFICERS AND
    CORPORATE GOVERNANCE


70Item 11. EXECUTIVE COMPENSATION


70Item 12. SECURITY OWNERSHIP OF CERTAIN
    BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
    MATTERS


70Item 13. CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS AND DIRECTOR INDEPENDENCE


72Item 14. PRINCIPAL ACCOUNTANT FEES AND
    SERVICES


72Part IVItem 15. EXHIBITS, FINANCIAL STATEMENT
    SCHEDULES


73SIGNATURES


73EXHIBITS


75EX-10.9EX-10.10EX-10.16EX-21EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I  STATEMENT
    REGARDING FORWARD-LOOKING STATEMENTS
  Except for the historical information and current statements
    contained in this Annual Report on
    Form 10-K,
    certain matters discussed herein or incorporated by reference,
    including, without limitation, Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations, in press releases, written statements or other
    documents filed with or furnished to the Securities and Exchange
    Commission (SEC), or in our communications or
    discussions through webcasts, conference calls and other
    presentations may be deemed to be forward-looking statements
    within the meaning of the Securities Act of 1933, as amended,
    and the Securities Exchange Act of 1934, as amended.
    Forward-looking statements involve risks and uncertainties.
    Actual results could differ materially from those projected in
    or contemplated by forward-looking statements due to a number of
    important factors, including the factors discussed under
    Item 1A. Risk Factors and Item 7.
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations.
  Item 1.
    BUSINESS    Operations
      Continental Commercial Products, LLC (CCP
  Continental ® ® tm ® ® ® ®
  Contico
 2




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##### Table of Contents



® ® ®
  Container ® tm
  CCP Canada
  Disco ® ® ® ® ®
  Gemtex ®
  Glit ® ® ® ® ® ® ® ® ® tm ® ® tm
  Wilen ® ® ®
      Markets
    and Competition
     3




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Backlog
    Raw
    Materials
   4




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Employees
    Regulatory
    and Environmental Matters
    Licenses,
    Patents and Trademarks
  ® ® ® ® ® ® ® ®
  Available
    Information
  http://www.sec.gov
  http://www.katyindustries.com Form 10-K, Form 10-Q, Form 8-K,
  Item 1A.
    RISK
    FACTORS    Our stock
    price has been, and likely will continue to be,
    volatile.
    
    announcements concerning us or our competitors;
    quarterly variations in operating results;
    introduction or abandonment of new technologies or products;
    divestiture or acquisition of business groups or units; 5




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
    limited trading in our stock;
    changes in product pricing policies;
    changes in governmental regulations affecting us; and
    changes in earnings estimates by analysts or changes in
    accounting policies.    Our
    common stock is quoted on the OTC Bulletin Board, which may
    have an unfavorable impact on our stock price and
    liquidity.
  over-the-counter
  We are
    dependent upon a continuous supply of raw materials from third
    party suppliers and would be harmed by a significant, prolonged
    disruption in supply.
    Price
    increases in raw materials could adversely affect our operating
    results and financial condition.
   6




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Fluctuations
    in the price, quality and availability of certain portions of
    our finished goods due to greater reliance on third party
    suppliers could negatively impact our results of
    operations.
    Our
    inability to realize the benefits of our recent facility
    consolidations and restructuring plans or any future acquisition
    integration plans could adversely affect our business and
    results of operations.
    Our
    inability to implement our strategy of continuously improving
    our productivity and streamlining our operations could have an
    adverse effect on our financial condition and results of
    operations.
    An
    increase in interest rates may negatively impact our operating
    results.
    The cost
    of servicing our debt on which we are required to make interest
    and principal payments may adversely affect our liquidity and
    financial condition, limit our ability to grow and compete, and
    prevent us from fulfilling our obligations under our
    indebtedness.
    
    make it more difficult for us to satisfy our outstanding debt
    obligations;
    require us to dedicate a substantial portion or even all of our
    cash flow from operations to payments on our debt, thereby
    reducing the amount of our cash flow available for working
    capital, capital expenditures, acquisitions, and other general
    corporate purposes; 7




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
    increase the amount of interest expense that we will have to pay
    because our borrowings are at variable rates of interest, which,
    if increased, will result in higher interest payments;
    limit our flexibility in planning for, or reacting to, changes
    in our business and the industries in which we compete;
    place us at a competitive disadvantage compared to our
    competitors, some of which have lower debt service obligations
    and greater financial resources than we do;
    limit our ability to borrow additional funds; and
    increase our vulnerability to existing and future adverse
    economic and industry conditions.    We are
    obligated to comply with financial and other covenants in our
    debt agreements that could restrict our operating activities,
    and the failure to comply with such covenants could result in
    defaults that accelerate the payment under our debt.
    
    incur additional debt;
    make certain distributions, investments and other restricted
    payments;
    limit the ability of restricted subsidiaries to make payments to
    us;
    enter into transactions with affiliates;
    create certain liens;
    sell assets and if sold, use the proceeds at managements
    discretion; and
    consolidate, merge or sell all or substantially all of our
    assets.     8




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and/or
  Work
    stoppages or other labor issues at our facilities or those of
    our suppliers could adversely affect our operations.
    We may
    not be able to protect our intellectual property rights
    adequately or assure that third parties will not claim
    proprietary rights infringement by us in the future.
      Disruption
    of our information technology and communications systems or our
    failure to adequately maintain our information technology and
    communications systems could have a material adverse effect on
    our business and operations.
     9




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Our
    future performance is influenced by our ability to remain
    competitive.
    Failure
    to maintain effective internal control over financial reporting
    could have material adverse effect on our business, results of
    operations, financial condition and stock price.
    Changes
    in laws and government regulations affecting environmental
    compliance and income taxes could adversely affect our business
    and results of operations.
     10




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We are
    subject to litigation that could adversely affect our operating
    results.
    We are
    primarily self-insured with respect to health insurance and
    workers compensation. If our reserves for health insurance
    and workers compensation claims and other expenses are
    inadequate, we may incur additional charges if the actual costs
    of these claims exceed the amounts estimated.
  and/or
  Management
    turnover could cause our business, results of operations and
    financial condition to suffer.
    Item 1B.
    UNRESOLVED
    STAFF COMMENTS   11




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Item 2.
    PROPERTIES    Location

Facility

Business UnitUNITED STATESCaliforniaNorwalk

Office, Manufacturing, Distribution

Continental, Contico, ContainerChino

Distribution

Continental, Contico, Glit, Wilen, DiscoGeorgiaAtlanta

Office, Manufacturing, Distribution

WilenMcDonough

Office, Manufacturing, Distribution

Glit, Wilen, DiscoWrens*

Office, Manufacturing, Distribution

GlitMissouriBridgeton

Office, Manufacturing, Distribution

Continental, Contico, CorporateHazelwood

Manufacturing

ConticoCANADAOntarioToronto

Office, Manufacturing, Distribution

Gemtex, CCP Canada   *
    
    Office/manufacturing facility is owned.    Item 3.
    LEGAL
    PROCEEDINGS    Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   12




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PART II Item 5.  MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES    mark-up,
  Period

High


Low2008First Quarter

$
2.20


$
0.85Second Quarter


1.95



0.85Third Quarter


1.75



0.80Fourth Quarter


1.44



0.702007First Quarter

$
2.72


$
2.00Second Quarter


2.20



1.05Third Quarter


1.65



1.10Fourth Quarter


2.00



0.75
     Dividend
    Policy
    Equity
    Compensation Plan Information
   13




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##### Table of Contents



Item 6.  SELECTED
    FINANCIAL DATA  Years Ended December 31,2008


2007


2006


2005


2004(Amounts in Thousands, except per share data and percentages)Net sales

$
167,802


$
187,771


$
192,416


$
200,085


$
221,390Gross profit

$
12,124


$
20,254


$
25,069


$
14,439


$
19,654Loss from continuing operations

$
(18,801
)

$
(13,881
)

$
(8,661
)

$
(22,466
)

$
(48,595
)Discontinued operations [a]


2,319



12,380



(2,962
)


8,669



12,474Cumulative effect of a change in accounting principle [a][b]










(756
)






Net loss


(16,482
)


(1,501
)


(12,379
)


(13,797
)


(36,121
)Payment-in-kind of dividends on convertible preferred stock [c]


















(14,749
)Net loss attributable to common stockholders

$
(16,482
)

$
(1,501
)

$
(12,379
)

$
(13,797
)

$
(50,870
)Loss per share of common stock  Basic and diluted:Loss from continuing operations attributable to common
    stockholders

$
(2.36
)

$
(1.75
)

$
(1.09
)

$
(2.83
)

$
(8.03
)Discontinued operations


0.29



1.56



(0.37
)


1.09



1.58Cumulative effect of a change in accounting principle










(0.09
)






Net loss attributable to common stockholders

$
(2.07
)

$
(0.19
)

$
(1.55
)

$
(1.74
)

$
(6.45
)Total assets

$
77,295


$
98,564


$
182,694


$
212,094


$
224,464Inventories, net


19,911



26,160



55,960



62,799



65,674Stockholders equity


19,293



36,456



42,032



54,704



68,585Long-term debt, including current maturities


17,546



13,453



56,871



57,660



58,737Impairments of long-lived assets [d]














2,112



29,974Severance, restructuring and related charges [d]


(360
)


2,581



17



956



2,621Depreciation and amortization [d]


8,259



7,294



7,628



7,699



10,779Capital expenditures [d]


7,535



4,403



3,733



8,210



9,773Working capital [e]

$
8,030


$
15,622


$
48,564


$
48,132


$
59,855Ratio of debt to capitalization


47.6
%


27.0
%


57.5
%


51.3
%


46.1
%Weighted average common shares outstanding  Basic and
    diluted


7,951,176



7,951,231



7,966,742



7,948,749



7,883,265Number of employees


680



920



1,172



1,544



1,793Cash dividends declared per common share

$



$



$



$



$
   [a]
    
    Presented net of tax.[b]
    
    This amount is stock compensation expense recorded with the
    adoption of Statement of Financial Accounting Standards
    (SFAS) No. 123R, Share-Based Payment.[c]
    
    Represents a 15%
    payment-in-kind
    dividend on our Convertible Preferred Stock. See Note 11 to
    the Consolidated Financial Statements in Part II,
    Item 8.[d]
    
    From continuing operations only.[e]
    
    Defined as current assets minus current liabilities, exclusive
    of deferred tax assets and liabilities and debt classified as
    current. 14




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Item 7.  MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Forward-Looking Statements
  This report and the information incorporated by reference in
    this report contain various forward-looking
    statements as defined in Section 27A of the
    Securities Act of 1933 and Section 21E of the Exchange Act
    of 1934, as amended. The forward-looking statements are based on
    the beliefs of our management, as well as assumptions made by,
    and information currently available to, our management. We have
    based these forward-looking statements on current expectations
    and projections about future events and trends affecting the
    financial condition of our business. Additional information
    concerning these and other risks and uncertainties is included
    in Item 1A under the caption Risk Factors.
    Words and phrases such as expects,
    estimates, will, intends,
    plans, believes, should,
    anticipates, and the like are intended to identify
    forward-looking statements. The results referred to in
    forward-looking statements may differ materially from actual
    results because they involve estimates, assumptions and
    uncertainties. Forward-looking statements included herein are as
    of the date hereof and we undertake no obligation to revise or
    update such statements to reflect events or circumstances after
    the date hereof or to reflect the occurrence of unanticipated
    events. All forward-looking statements should be viewed with
    caution. These forward-looking statements are subject to risks
    and uncertainties that may lead to results that differ
    materially from those expressed in any forward-looking statement
    made by us or on our behalf, including, among other things:
  −
    Increases in the cost of, or in some cases continuation of,
    the current price levels of thermoplastic resins, paper board
    packaging, and other raw materials.−
    Our inability to reduce product costs, including
    manufacturing, sourcing, freight, and other product costs.−
    Our inability to reduce administrative costs through
    consolidation of functions and systems improvements.−
    Our inability to protect our intellectual property rights
    adequately.−
    Our inability to reduce our raw materials costs.−
    Our inability to expand our customer base and increase
    corresponding revenues.−
    Our inability to achieve product price increases, especially
    as they relate to potentially higher raw material costs.−
    Competition from foreign competitors.−
    The potential impact of rising interest rates on our debt
    outstanding under the Bank of America Credit Agreement.−
    Our inability to meet covenants associated with the Bank of
    America Credit Agreement.−
    Our inability to access funds under our current loan
    agreements given the current instability in the credit
    markets.−
    Our failure to identify, and promptly and effectively
    remediate, any material weaknesses or significant deficiencies
    in our internal controls over financial reporting.−
    The potential impact of rising costs for insurance for
    properties and various forms of liabilities.−
    The potential impact of changes in foreign currency exchange
    rates related to our Canadian operations.−
    Labor issues, including union activities that require an
    increase in production costs or lead to a strike, thus impairing
    production and decreasing sales, and labor relations issues at
    entities involved in our supply chain, including both suppliers
    and those involved in transportation and shipping.−
    Changes in significant laws and government regulations
    affecting environmental compliance and income taxes. 15




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Restatement
    of Prior Financial Information
  Form 10-K/A Form 10-Q/A
  OVERVIEW
             16




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Discontinued
    Operations
          17




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Years Ended December 31,2008


2007


2006(Amounts in Millions, except per share data and percentages)$


% to Sales


$


% to Sales


$


% to SalesNet sales

$
167.8



100.0


$
187.8



100.0


$
192.4



100.0Cost of goods sold


155.7



92.8



167.5



89.2



167.3



87.0Gross profit


12.1



7.2



20.3



10.8



25.1



13.0Selling, general and administrative expenses


29.0



(17.2
)


26.0



(13.8
)


30.5



(15.8
)Severance, restructuring and related charges


(0.4
)


0.2



2.6



(1.4
)






Loss on sale or disposal of assets


1.0



(0.6
)


2.4



(1.3
)


0.4



(0.2
)Operating loss


(17.5
)


(10.4
)


(10.7
)


(5.7
)


(5.8
)


(3.0
)Equity in income of equity method investment










0.8







Gain on SESCO joint venture transaction


















0.6Interest expense


(1.7
)






(4.6
)






(4.2
)Other, net


0.5







(0.1
)






0.2Loss from continuing operations before income tax (provision)
    benefit


(18.7
)






(14.6
)






(9.2
)Income tax (provision) benefit from continuing operations


(0.1
)






0.7







0.5Loss from continuing operations


(18.8
)






(13.9
)






(8.7
)Income from operations of discontinued businesses (net of tax)


0.6







2.3







2.5Gain (loss) on sale of discontinued businesses (net of tax)


1.7







10.1







(5.4
)Loss before cumulative effect of a change in accounting principle


(16.5
)






(1.5
)






(11.6
)Cumulative effect of a change in accounting principle (net of
    tax)


















(0.8
)Net loss

$
(16.5
)





$
(1.5
)





$
(12.4
)Loss per share of common stock  Basic and dilutedLoss from continuing operations

$
(2.36
)





$
(1.75
)





$
(1.09
)Discontinued operations


0.29







1.56







(0.37
)Cumulative effect of a change in accounting principle


















(0.09
)Net loss

$
(2.07
)





$
(0.19
)





$
(1.55
)   RESULTS
    OF OPERATIONS
  2008
    COMPARED TO 2007
     18




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Severance,
    Restructuring and Related Charges
    Other
            2007
    COMPARED TO 2006
   19




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Severance,
    Restructuring and Related Charges
    Other
      Accounting for Uncertainty in
    Income Taxes
 20




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Share-Based Payments
  LIQUIDITY
    AND CAPITAL RESOURCES
      Bank of
    America Credit Agreement
  sub-limit
       21




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and/or
    No. 95-22, Balance Sheet Classification of Borrowings Outstanding under
    Revolving Credit Agreements that Include Both a Subjective
    Acceleration Clause and a Lock-Box Arrangement
  Cash
    Flow
   22




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Contractual
    Obligations
    Due in less


Due in


Due in


Due afterContractual Cash Obligations

Total


than 1 Year


1-3 Years


3-5 Years


5 YearsRevolving credit facility [a]

$
9,118


$
9,118


$



$



$
Term loan


8,428



1,500



6,928







Interest on debt [b]


1,118



609



509







Operating leases [c]


27,155



4,731



7,334



4,191



10,899Severance and restructuring [c]


245



72



173







Settlement payments [d]


5,500



1,500



3,600



400



Postretirement benefits [e]


3,768



572



942



710



1,544Total Contractual Obligations

$
55,332


$
18,102


$
19,486


$
5,301


$
12,443   Due in less


Due in


Due in


Due afterOther Commercial Commitments

Total


than 1 Year


1-3 Years


3-5 Years


5 YearsCommercial letters of credit

$
130


$
130


$



$



$
Stand-by letters of credit


3,855



3,855











Total Commercial Commitments

$
3,985


$
3,985


$



$



$
   [a]
    As discussed in the Liquidity and Capital Resources section
    above and in Note 8 to the Consolidated Financial
    Statements in Part II, Item 8, the entire Revolving
    Credit Facility under the Bank of America Revolving Credit
    Agreement is classified as a current liability on the
    Consolidated Balance Sheets as a result of the combination in
    the Bank of America Credit Agreement of (i) lockbox
    agreements on Katys depository bank accounts, and
    (ii) a subjective Material Adverse Effect (MAE)
    clause. The Revolving Credit Facility expires in November 2010.  [b]
    Represents interest on the Revolving Credit Facility and Term
    Loan of the Bank of America Credit Agreement. Amounts assume
    interest accrues at the rate in effect as of December 31,
    2008. The amount also assumes the principal balance of the
    Revolving Credit Facility remains constant through its
    expiration date of November 30, 2010 and the principal
    balance of the Term Loan amortizes in accordance with the terms
    of the Bank of America Credit Agreement. Due to the variable
    nature of the Bank of America Credit Agreement, actual interest
    rates 23




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could differ from the assumptions above. In addition, actual
    borrowing levels could differ from the assumptions above due to
    liquidity needs.  [c]
    Future non-cancelable lease rentals are included in the line
    entitled Operating leases, which represent
    obligations associated with restructuring activities. The line
    entitled Severance and restructuring represents the
    remaining obligations associated with restructuring activities,
    net of the future non-cancelable lease rentals. The Consolidated
    Balance Sheets at December 31, 2008 and 2007 include
    $0.6 million and $1.5 million, respectively, in
    discounted liabilities associated with non-cancelable operating
    lease rentals, net of estimated sub-lease revenues, related to
    facilities that have been abandoned as a result of restructuring
    and consolidation activities.  [d]
    Amount owed to PUSA as a result of the settlement agreement,
    discussed in Note 17 to the Consolidated Financial
    Statements. $1.5 million of this obligation is classified
    in the Consolidated Balance Sheets as an accrued expense in
    current liabilities, while the remainder is included in other
    liabilities.  [e]
    Benefits consist of postretirement medical obligations to
    retirees of former subsidiaries of Katy, as well as deferred
    compensation plan liabilities to former officers of the Company,
    discussed in Note 10 to the Consolidated Financial
    Statements in Part II, Item 8.    Off-balance
    Sheet Arrangements
    TRANSACTIONS
    WITH RELATED AND CERTAIN OTHER PARTIES
    SEVERANCE,
    RESTRUCTURING AND RELATED CHARGES
      2008


2007


2006Consolidation of Glit facilities

$
(410
)

$
1,699


$
299Consolidation of St. Louis manufacturing/distribution
    facilities


50



882



(499
)Corporate office relocation










217Total severance, restructuring and related charges

$
(360
)

$
2,581


$
17  24




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One-time


ContractTermination


TerminationTotal


Benefits [a]


Costs [b]


Other [c]Restructuring liabilities at December 31, 2006

$
470


$



$
470


$
Additions


2,656



151



2,332



173Reductions


(75
)






(75
)


Payments


(909
)


(151
)


(585
)


(173
)Other


(689
)






(689
)


Restructuring liabilities at December 31, 2007

$
1,453


$



$
1,453


$
Additions


50







50



Payments


(524
)






(524
)


Other


(410
)






(410
)


Restructuring liabilities at December 31, 2008

$
569


$



$
569


$
   [a]
    Includes severance, benefits, and other employee-related costs
    associated with the employee terminations.  [b]
    Includes charges related to non-cancelable lease liabilities for
    abandoned facilities, net of potential sub-lease revenue. Total
    maximum potential amount of lease loss, excluding any sublease
    rentals, is $1.5 million as of December 31, 2008. The
    Company has included $0.9 million as an offset for sublease
    rentals.  [c]
    Includes charges associated with equipment removal and cleanup
    of abandoned facilities.      OUTLOOK FOR
    2009
     25




---



##### Table of Contents



and/or
 26




---



##### Table of Contents



CRITICAL
    ACCOUNTING ESTIMATES
    Revenue Recognition
  Stock-based Compensation Share-Based Payment
  Accounts Receivable
  Inventories and/or
   27




---



##### Table of Contents



Goodwill and Impairments of Long-Lived Assets Goodwill and Intangible Assets,
  Accounting for the Impairment or
    Disposal of Long-Lived Assets, and/or
  Deferred Income Taxes Accounting for Income Taxes
   28




---



##### Table of Contents



Workers Compensation and Product
    Liabilities
  Environmental and Other Contingencies
  Severance, Restructuring and Related
    Charges Accounting for Costs Associated with Exit or Disposal
    Activities
  NEW
    ACCOUNTING PRONOUNCEMENTS
   29




---



##### Table of Contents



Item 7A.  QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Interest Rate Risk
    Foreign
    Exchange Risk
    Commodity
    Price Risk
   30




---



##### Table of Contents



Item 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              
 31




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
               
 32




---



##### Table of Contents



KATY
    INDUSTRIES, INC. AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS
    AS OF DECEMBER 31, 2008 and 2007
    (Amounts in Thousands)
  ASSETS
  2008


2007CURRENT ASSETS:Cash

$
683


$
2,015Trade accounts receivable, net of allowances of $287 and $261


13,773



18,077Inventories, net


19,911



26,160Receivable from disposition






6,799Other current assets


3,516



2,520Total current assets


37,883



55,571OTHER ASSETS:Goodwill


665



665Intangibles, net


4,455



4,853Other


1,809



3,470Total other assets


6,929



8,988PROPERTY AND EQUIPMENTLand and improvements


336



336Buildings and improvements


8,686



9,666Machinery and equipment


92,693



96,650101,715



106,652Less  Accumulated depreciation


(69,232
)


(72,647
)Property and equipment, net


32,483



34,005Total assets

$
77,295


$
98,564    33




---



##### Table of Contents



KATY
    INDUSTRIES, INC. AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS
    AS OF DECEMBER 31, 2008 and 2007
    (Amounts in Thousands, Except Share Data)
  LIABILITIES
    AND STOCKHOLDERS EQUITY
  2008


2007CURRENT LIABILITIES:Accounts payable

$
10,283


$
10,452Book overdraft


2,289



4,543Accrued compensation


3,015



2,629Accrued expenses


14,266



22,325Current maturities, long-term debt


1,500



1,500Revolving credit agreement


9,118



2,853Total current liabilities


40,471



44,302LONG-TERM DEBT, less current maturities


6,928



9,100OTHER LIABILITIES


10,603



8,706Total liabilities


58,002



62,108COMMITMENTS AND CONTINGENCIES (Notes 17 and 20)STOCKHOLDERS EQUITY15% Convertible preferred stock, $100 par value;
    authorized 1,200,000 shares; issued and outstanding
    1,131,551 shares; liquidation value $113,155


108,256



108,256Common stock, $1 par value; authorized
    35,000,000 shares; issued 9,822,304 shares


9,822



9,822Additional paid-in capital


27,248



27,338Accumulated other comprehensive loss


(1,742
)


(1,112
)Accumulated deficit


(102,397
)


(85,915
)Treasury stock, at cost, 1,871,128 shares


(21,894
)


(21,933
)Total stockholders equity


19,293



36,456Total liabilities and stockholders equity

$
77,295


$
98,564    34




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##### Table of Contents



KATY
    INDUSTRIES, INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF OPERATIONS
    FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
    (Amounts in Thousands, Except Per Share Data)
  2008


2007


2006Net sales

$
167,802


$
187,771


$
192,416Cost of goods sold


155,678



167,517



167,347Gross profit


12,124



20,254



25,069Selling, general and administrative expenses


28,944



25,985



30,450Severance, restructuring and related charges


(360
)


2,581



17Loss on sale or disposal of assets


995



2,434



412Operating loss


(17,455
)


(10,746
)


(5,810
)Equity in income of equity method investment






783



Gain on SESCO joint venture transaction










563Interest expense


(1,686
)


(4,565
)


(4,221
)Other, net


467



(72
)


278Loss from continuing operations before income tax (provision)
    benefit


(18,674
)


(14,600
)


(9,190
)Income tax (provision) benefit from continuing operations


(127
)


719



529Loss from continuing operations


(18,801
)


(13,881
)


(8,661
)Income from operations of discontinued businesses (net of tax)


584



2,259



2,443Gain (loss) on sale of discontinued businesses (net of tax)


1,735



10,121



(5,405
)Loss before cumulative effect of a change in accounting principle


(16,482
)


(1,501
)


(11,623
)Cumulative effect of a change in accounting principle (net of
    tax)










(756
)Net loss

$
(16,482
)

$
(1,501
)

$
(12,379
)Loss per share of common stock  Basic and dilutedLoss from continuing operations

$
(2.36
)

$
(1.75
)

$
(1.09
)Discontinued operations


0.29



1.56



(0.37
)Cumulative effect of a change in accounting principle










(0.09
)Net loss

$
(2.07
)

$
(0.19
)

$
(1.55
)    35




---



##### Table of Contents



KATY
    INDUSTRIES, INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
    FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
    (Amounts in Thousands, Except Share Data)
  AccumulatedConvertible











OtherPreferred Stock


Common Stock


Additional


Compre-








Compre-


TotalNumber of


Par


Number of


Par


Paid-in


hensive


Accumulated


Treasury


hensive


StockholdersShares


Value


Shares


Value


Capital


Income/(Loss)


Deficit


Stock


Loss


EquityBalance, January 1, 2006


1,131,551


$
108,256



9,822,204


$
9,822


$
27,067


$
3,158


$
(71,055
)

$
(22,544
)





$
54,704Net loss


























(12,379
)





$
(12,379
)


(12,379
)Foreign currency translation adjustment






















686











686



686Interest rate swap






















22











22



22Comprehensive loss

































$
(11,671
)Adoption of SFAS 158






















(1,624
)














(1,624
)Purchase of treasury stock






























(111
)






(111
)Stock option exercise


















(378
)










525







147Stock compensation


















587



















587Other










100







(156
)










156







Balance, December 31, 2006


1,131,551


$
108,256



9,822,304


$
9,822


$
27,120


$
2,242


$
(83,434
)

$
(21,974
)





$
42,032Net loss


























(1,501
)





$
(1,501
)


(1,501
)Foreign currency translation adjustment






















(4,551
)










(4,551
)


(4,551
)Interest rate swap






















(76
)










(76
)


(76
)Pension and other postretirement benefits






















1,273











1,273



1,273Comprehensive loss

































$
(4,855
)Adoption of FIN 48


























(980
)










(980
)Purchase of treasury stock






























(3
)






(3
)Stock compensation


















262



















262Other


















(44
)










44







Balance, December 31, 2007


1,131,551


$
108,256



9,822,304


$
9,822


$
27,338


$
(1,112
)

$
(85,915
)

$
(21,933
)





$
36,456Net loss


























(16,482
)





$
(16,482
)


(16,482
)Foreign currency translation adjustment






















(761
)










(761
)


(761
)Pension and other postretirement benefits






















131











131



131Comprehensive loss

































$
(17,112
)Stock compensation


















(51
)


















(51
)Other


















(39
)










39







Balance, December 31, 2008


1,131,551


$
108,256



9,822,304


$
9,822


$
27,248


$
(1,742
)

$
(102,397
)

$
(21,894
)





$
19,293   See Notes to Consolidated Financial
    Statements.
  36




---



##### Table of Contents



KATY
    INDUSTRIES, INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
    (Amounts in Thousands)
  2008


2007


2006Cash flows from operating activities:Net loss

$
(16,482
)

$
(1,501
)

$
(12,379
)(Income) loss from discontinued operations


(2,319
)


(12,380
)


2,962Loss from continuing operations


(18,801
)


(13,881
)


(9,417
)Cumulative effect of a change in accounting principle










756Depreciation and amortization


8,259



7,294



7,628Write-off and amortization of debt issuance costs


382



2,007



1,178Write-off of assets due to lease termination






751



Stock option (income) expense


(51
)


262



587Loss on sale or disposal of assets


995



2,434



412Gain on litigation settlement


(723
)






Equity in income of equity method investment






(783
)


Deferred income taxes


48



(48
)


14(9,891
)


(1,964
)


1,158Changes in operating assets and liabilities:Accounts receivable


4,061



1,383



3,272Inventories


5,738



(5,330
)


7,045Other assets


(1,095
)


(220
)


(283
)Accounts payable


53



60



(3,076
)Accrued expenses


(2,740
)


(5,541
)


(1,062
)Other


(1,378
)


1,399



(4,236
)4,639



(8,249
)


1,660Net cash (used in) provided by continuing operations


(5,252
)


(10,213
)


2,818Net cash provided by (used in) discontinued operations


425



74



(75
)Net cash (used in) provided by operating activities


(4,827
)


(10,139
)


2,743Cash flows from investing activities:Capital expenditures


(7,535
)


(4,403
)


(3,733
)Proceeds from sale of assets, net


159



246



289Net cash used in continuing operations


(7,376
)


(4,157
)


(3,444
)Net cash provided by discontinued operations


9,169



55,195



3,738Net cash provided by investing activities


1,793



51,038



294Cash flows from financing activities:Net borrowings (repayments) on revolving loans


6,265



(41,026
)


1,934Decrease in book overdraft


(2,254
)


(1,903
)


(1,534
)Proceeds from term loans






573



1,364Repayments of term loans


(2,172
)


(2,965
)


(4,086
)Direct costs associated with debt facilities






(236
)


(312
)Repurchases of common stock






(3
)


(111
)Proceeds from the exercise of stock options










147Net cash provided by (used in) continuing operations


1,839



(45,560
)


(2,598
)Net cash used in discontinued operations






(570
)


(1,071
)Net cash provided by (used in) financing activities


1,839



(46,130
)


(3,669
)Effect of exchange rate changes on cash


(137
)


(146
)


(397
)Net decrease in cash


(1,332
)


(5,377
)


(1,029
)Cash, beginning of period


2,015



7,392



8,421Cash, end of period

$
683


$
2,015


$
7,392   See Notes to Consolidated Financial
    Statements.
 37




---



##### Table of Contents



KATY
    INDUSTRIES, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    As of December 31, 2008 and 2007
  Note 1.
    ORGANIZATION
    OF THE BUSINESS    Note 2.
    RESTATEMENT
    OF PRIOR FINANCIAL INFORMATION  Form 10-K/A Form 10-Q/A
  Note 3.
    SIGNIFICANT
    ACCOUNTING POLICIES  Consolidation Policy
      Use of Estimates
  Reclassifications
  Revenue Recognition
 38




---



##### Table of Contents



Revenue Recognition When Right of Return Exists No. 01-09, Accounting for Consideration Given by a Vendor to a
    Customer
  Advertising Costs
  Accounts Receivable and Allowance for Doubtful
    Accounts
  Inventories last-in, first-in,
  December 31,2008


2007(Amounts in Thousands)Raw materials

$
12,764


$
17,022Work in process


718



763Finished goods


12,054



13,762Inventory reserves


(1,345
)


(1,376
)LIFO reserve


(4,280
)


(4,011
)$
19,911


$
26,160
   Goodwill Goodwill and Intangible
    Assets
 39




---



##### Table of Contents



Property and Equipment (10-40 years);
  Accounting for
    Asset Retirement Obligations
  SFAS No. 143 Obligation at December 31, 2006

$
1,117Accretion expense


42Changes in estimates


(173
)Write-off from sale of discontinued businesses


(157
)SFAS No. 143 Obligation at December 31, 2007


829Accretion expense


34Changes in estimates


(36
)SFAS No. 143 Obligation at December 31, 2008

$
827
     Impairment of Long-lived Assets
  Shipping and Handling Costs
  Income Taxes
  Foreign Currency Translation
 40




---



##### Table of Contents



Fair Value of Financial Instruments
  Stock Options and Other Stock Awards Share-Based Payment
    2008


2007


2006Recorded in selling, general and administrative expense:Stock option (income) expense

$
(51
)

$
262


$
587Stock appreciation right (income) expense


(135
)


8



(189
)Recorded in cumulative effect of a change in accounting
    principle:Stock appreciation right expense










756$
(186
)

$
270


$
1,154     Accounting for Stock Issued to Employees
  Share-Based
 41




---



##### Table of Contents



Payment
  Expected term (years)

5.5  6.6Volatility

82.2%  112.9%Risk-free interest rate

2.9%  3.4%
     December 31,2008

2007

2006Expected term (years)

2.4  4.7

3.0  4.7

3.0  5.5Volatility

121.3%  161.5%

85.4%  97.1%

52.6%  56.5%Risk-free interest rate

0.9%  1.5%

3.1%  3.3%

4.7%   Derivative Financial Instruments Accounting for
    Derivative Financial Instruments and Hedging Activities
    Recently Adopted Accounting Standards The Hierarchy
    of Generally Accepted Accounting Principles
 42




---



##### Table of Contents



Recently Issued Accounting Standards Business Combinations
  Fair Value Measurements No. 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active No. 157-3). No. 157-3
  Noncontrolling Interests in Consolidated Financial
    Statements-an amendment of ARB No. 51
  Disclosures about Derivative Instruments and Hedging
    Activities  an amendment of FASB Statement
    No. 133
  No. 142-3, Determination of the Useful Life of Intangible Assets No. 142-3). No. 142-3 Goodwill and Other Intangible
    Assets No. 142-3 No. 142-3
  No. 132R-1 No. 132R-1), No. 132R-1 No. 132R-1
  Note 4.
    GOODWILL AND
    INTANGIBLE ASSETS   43




---



##### Table of Contents



December 31, 2008


December 31, 2007Gross


Accumulated


Net Carrying


Gross


Accumulated


Net CarryingAmount


Amortization


Amount


Amount


Amortization


AmountPatents

$
1,118


$
(832
)

$
286


$
1,031


$
(734
)

$
297Customer lists


10,231



(8,406
)


1,825



10,231



(8,240
)


1,991Tradenames


5,054



(2,710
)


2,344



5,054



(2,489
)


2,565Other














441



(441
)


Total

$
16,403


$
(11,948
)

$
4,455


$
16,757


$
(11,904
)

$
4,853     2009

$
4652010


4602011


4332012


4082013


387Thereafter


2,302Total

$
4,455
   Note 5.
    EQUITY
    METHOD INVESTMENT    Note 6.
    DISCONTINUED
    OPERATIONS       44




---



##### Table of Contents



December 31,2008


2007Current assets:Other current assets

$
1,200


$
8,034Non-current assets:Other

$



$
600Current liabilities:Accounts payable

$



$
30Accrued expenses






148$



$
178
     2008


2007


2006Net sales

$



$
166,691


$
225,235Pre-tax operating (loss) income

$
(314
)

$
4,939


$
5,291Pre-tax gain (loss) on sale of discontinued businesses

$
1,735


$
10,121


$
(5,405
)   Note 7.
    SAVANNAH
    ENERGY SYSTEMS COMPANY PARTNERSHIP   45




---



##### Table of Contents



Note 8.
    INDEBTEDNESS    December 31,2008


2007(Amounts in Thousands)Term loan payable under the Bank of America Credit Agreement,
    interest based on LIBOR and Prime Rates (3.75% 
    4.00%), due through 2010

$
8,428


$
10,600Revolving loans payable under the Bank of America Credit
    Agreement, interest based on LIBOR and Prime Rates
    (3.50%  3.75%)


9,118



2,853Total debt


17,546



13,453Less revolving loans, classified as current (see below)


(9,118
)


(2,853
)Less current maturities


(1,500
)


(1,500
)Long-term debt

$
6,928


$
9,100     2009

$
1,5002010


6,928Total

$
8,428
      46




---



##### Table of Contents



No. 95-22, Balance Sheet Classification of Borrowings Outstanding under
    Revolving Credit Agreements that
 47




---



##### Table of Contents



Include Both a Subjective Acceleration Clause and a Lock-Box
    Arrangement
  Note 9.
    EARNINGS
    (LOSS) PER SHARE  Earnings Per Share
  For the Years Ended
    December 31,

2008


2007


2006(Amounts in Thousands, except per share amounts)Basic and Diluted EPS:Loss from continuing operations

$
(18,801
)

$
(13,881
)

$
(8,661
)Discontinued operations


2,319



12,380



(2,962
)Cumulative effect of a change in accounting principle










(756
)Net loss

$
(16,482
)

$
(1,501
)

$
(12,379
)Weighted average shares  Basic and Diluted


7,951



7,951



7,967Per share amount:Loss from continuing operations

$
(2.36
)

$
(1.75
)

$
(1.09
)Discontinued operations


0.29



1.56



(0.37
)Cumulative effect of a change in accounting principle










(0.09
)Net loss

$
(2.07
)

$
(0.19
)

$
(1.55
)     Note 10.
    RETIREMENT
    BENEFIT PLANS  Pension and Other Postretirement Plans
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans, an amendment of FASB Statements
    No. 87, 88, 106 and 132(R)
 48




---



##### Table of Contents



Pension Benefits


Other Benefits2008


2007


2008


2007(Amounts in Thousands)Change in projected benefit obligation:Projected benefit obligation at beginning of year

$
1,398


$
1,539


$
2,607


$
3,831Service cost






13







Interest cost


85



90



140



155Actuarial (gain) loss


45



(63
)


(280
)


(1,118
)Adjustment for change in measurement date


8











Benefits paid


(389
)


(181
)


(244
)


(261
)Projected benefit obligation at end of year

$
1,147


$
1,398


$
2,223


$
2,607Change in plan assets:Fair value of plan assets at beginning of year

$
1,347


$
1,297


$



$
Actuarial return on plan assets


(224
)


89







Employer contributions


18



142



244



261Adjustment for change in measurement date


(2
)










Benefits paid


(389
)


(181
)


(244
)


(261
)Fair value of plan assets at end of year

$
750


$
1,347


$



$
Funded status at end of year

$
(397
)

$
(51
)

$
(2,223
)

$
(2,607
)Amounts recognized in Consolidated Balance Sheets:Other non-current assets

$
(47
)

$
(49
)

$



$
Accrued expenses










207



237Other liabilities


444



100



2,016



2,370Total

$
397


$
51


$
2,223


$
2,607    49




---



##### Table of Contents



2008


2007Accumulated





AccumulatedProjected Benefit


Benefit Obligation


Projected Benefit


Benefit ObligationObligation Exceeds


Exceeds


Obligation Exceeds


ExceedsPlan Assets


Plan Assets


Plan Assets


Plan AssetsProjected benefit obligation

$
969


$
969


$
1,217


$
1,217Accumulated benefit obligation

$
969


$
969


$
1,217


$
1,217Fair value of plan assets

$
525


$
525


$
1,117


$
1,117     Pension Benefits


Other Benefits2008


2007


2008


2007Assumptions as of December 31:Discount rates


6.75
%


6.25
%


6.75
%


6.25
%Expected long-term return rate on assets


7.00
%


7.00
%


N/A



N/AAssumed rates of compensation increases


N/A



N/A



N/A



N/AMedical trend rate pre-65 (initial)


N/A



N/A



6.50
%


7.00
%Medical trend rate post-65 (initial)


N/A



N/A



7.50
%


8.00
%Medical trend rate (ultimate)


N/A



N/A



5.00
%


5.00
%Years to ultimate rate pre-65


N/A



N/A



4



5Years to ultimate rate post-65


N/A



N/A



6



7Impact of one-percent increase in health care trend rate:Increase in accumulated postretirement benefit obligation









$
180


$
212Increase in service cost and interest cost









$
12


$
14Impact of one-percent decrease in health care trend rate:Decrease in accumulated postretirement benefit obligation









$
157


$
185Decrease in service cost and interest cost









$
11


$
12     Percentage of Plan AssetsDecember 31,Asset Category

2008


2007Equity Securities


40
%


48
%Debt Securities


55
%


52
%Real Estate


0
%


0
%Other


5
%


0
%
  50




---



##### Table of Contents



Pension Benefits


Other Benefits2008


2007


2008


2007Service cost

$



$
13


$



$
Interest cost


85



90



140



155Expected return on plan assets


(88
)


(93
)






Amortization of prior service cost














19Amortization of net loss


35



50







34Net periodic benefit cost

$
32


$
60


$
140


$
208       Pension Benefits


Other Benefits2009

$
52


$
2142010


57



2142011


56



2122012


55



2102013


58



206Thereafter


396



947Total

$
674


$
2,003
   and/or
  401(k) Plans
    Note 11.
    STOCKHOLDERS
    EQUITY  Convertible Preferred Stock
   51




---



##### Table of Contents



Share Repurchase
    Note 12.
    STOCK
    INCENTIVE PLANS     52




---



##### Table of Contents



WeightedWeighted


Average


AggregateAverage


Remaining


IntrinsicExercise


Contractual


ValueOptions


Price


Life


(In Thousands)Outstanding at December 31, 2007


1,632,200


$
3.59Granted


1,000,000



1.19Expired


(6,000
)


18.13Cancelled


(1,001,600
)


3.03Outstanding at December 31, 2008


1,624,600


$
2.41



7.24 years


$
Vested and Exercisable at December 31, 2008


624,600


$
4.36



3.72 years


$
       WeightedAverageOptions


Fair ValueNon-Vested at December 31, 2007


13,333


$
0.80Granted


6,000



0.94Vested


(12,667
)


0.86Non-Vested at December 31, 2008


6,666


$
0.80Total Outstanding at December 31, 2008


595,717


$
0.71
       Note 13.
    INCOME TAXES    2008


2007


2006(Amounts in Thousands)Domestic

$
(18,288
)

$
(15,114
)

$
(10,345
)Foreign


(386
)


514



1,155Total

$
(18,674
)

$
(14,600
)

$
(9,190
)  53




---



##### Table of Contents



2008


2007


2006(Amounts in Thousands)Current tax provision (benefit):Federal

$
898


$
(800
)

$
(559
)State


(55
)


35



30Foreign


(764
)






Total

$
79


$
(765
)

$
(529
)Deferred tax provision:Federal

$



$



$
State










Foreign


48



46



Total

$
48


$
46


$
Total provision (benefit) from continuing operations

$
127


$
(719
)

$
(529
)       2008


2007


2006(Amounts in Thousands)Benefit from income taxes at statutory rate

$
(6,514
)

$
(5,110
)

$
(3,217
)State income taxes, net of federal benefit


(36
)


23



20Foreign tax rate differential






325



404Net operating losses adjustments


(162
)


(4
)


2,518Valuation allowance adjustments


7,715



3,843



(277
)Foreign NOL utilization


(123
)


65



113Permanent items


16



18



(124
)Reduction of tax reserves


(734
)






Other, net


(35
)


121



34Net provision for (benefit from) income taxes

$
127


$
(719
)

$
(529
)  54




---



##### Table of Contents



2008


2007(Amounts in Thousands)Deferred tax liabilitiesInventory costs

$
(872
)

$
(1,074
)Deferred tax assetsAllowance for doubtful receivables

$
115


$
104Accrued expenses and other items


8,015



9,872Difference between book and tax bases of property


8,639



10,383Operating loss carry-forwards  domestic


44,121



34,521Operating loss carry-forwards  foreign


131



48Tax credit carry-forwards


13,872



12,50074,893



67,428Less valuation allowance


(74,021
)


(66,306
)872



1,122Net deferred income tax asset

$



$
48       Accounting for Uncertainty in Income Taxes
 55




---



##### Table of Contents



Balances at January 1, 2007

$
2,043Tax positions related to prior years


61Tax positions related to the current year


819Reductions for tax positions related to prior years


(329
)Settlements and payments


(339
)Lapse of applicable statute of limitations


(201
)Balances at December 31, 2007


2,054Tax positions related to prior years


11Reductions for tax positions related to prior years


(283
)Lapse of applicable statute of limitations


(463
)Balances at December 31, 2008

$
1,319           Repatriation of Foreign Earnings
    Note 14.
    LEASE
    OBLIGATIONS   56




---



##### Table of Contents



2009

$
4,7312010


4,2252011


3,1092012


2,1682013


2,023Thereafter


10,899Total minimum payments

$
27,155
       Note 15.
    RELATED
    PARTY TRANSACTIONS    Note 16.
    INDUSTRY
    SEGMENTS AND GEOGRAPHIC INFORMATION   57




---



##### Table of Contents



Years Ended December 31,2008


2007


2006(Amounts in Thousands)Maintenance Products GroupNet external sales



$
167,802


$
187,771


$
192,416Operating (loss) income




(7,485
)


571



4,825Operating (deficit) margin




(4.5
)%


0.3
%


2.5
%Depreciation and amortization




8,171



7,175



7,516Capital expenditures




7,535



4,373



3,713Total assets




73,304



85,124



86,147Net sales

- Segment

$
167,802


$
187,771


$
192,416Total

$
167,802


$
187,771


$
192,416Operating (loss) income

- Segment

$
(7,485
)

$
571


$
4,825- Unallocated corporate


(9,335
)


(6,302
)


(10,206
)- Severance, restructuring and
     related charges


360



(2,581
)


(17
)- Loss on sale or disposal of assets


(995
)


(2,434
)


(412
)Total

$
(17,455
)

$
(10,746
)

$
(5,810
)Depreciation and amortization

- Segment

$
8,171


$
7,175


$
7,516- Unallocated corporate


88



119



112Total

$
8,259


$
7,294


$
7,628Capital expenditures

- Segment

$
7,535


$
4,373


$
3,713- Unallocated corporate






30



20- Discontinued operations






261



1,009Total

$
7,535


$
4,664


$
4,742Total assets

- Segment

$
73,304


$
85,124


$
86,147- Other [a]


1,200



8,634



89,645- Unallocated corporate


2,791



4,806



6,902Total

$
77,295


$
98,564


$
182,694    58




---



##### Table of Contents



United(Amounts in Thousands)

States


Canada


Europe


Other


Consolidated2008:Sales to unaffiliated customers

$
155,527


$
8,954


$
1,373


$
1,948


$
167,802Total assets

$
72,869


$
4,426


$



$



$
77,2952007:Sales to unaffiliated customers

$
179,581


$
3,296


$
2,571


$
2,323


$
187,771Total assets

$
89,816


$
8,748


$



$



$
98,5642006:Sales to unaffiliated customers

$
177,776


$
9,128


$
2,320


$
3,192


$
192,416Total assets

$
145,512


$
24,678


$
12,264


$
240


$
182,694     Note 17.
    COMMITMENTS
    AND CONTINGENCIES  General
    Environmental Claims
    W.J.
    Smith Wood Preserving Company (W.J. Smith)
     59




---



##### Table of Contents



Asbestos
    Claims
      and/or
        Non-Environmental
    Litigation  Banco del Atlantico, S.A.
  and/or
 60




---



##### Table of Contents



with prejudice with prejudice
  with prejudice
    predecessor-in-interest.
  Other
    Claims
   61




---



##### Table of Contents



Note 18.
    SEVERANCE,
    RESTRUCTURING AND RELATED CHARGES      2008


2007


2006Consolidation of Glit facilities

$
(410
)

$
1,699


$
299Consolidation of St. Louis manufacturing/distribution
    facilities


50



882



(499
)Corporate office relocation










217Total severance, restructuring and related charges

$
(360
)

$
2,581


$
17   Consolidation of Glit facilities
  One-time


ContractTermination


TerminationTotal


Benefits [a]


Costs [b]


Other [c]Restructuring liabilities at December 31, 2006

$
5


$



$
5


$
Additions


1,774



151



1,450



173Reductions


(75
)






(75
)


Payments


(389
)


(151
)


(65
)


(173
)Other


(689
)






(689
)


Restructuring liabilities at December 31, 2007

$
626


$



$
626


$
Payments


(216
)






(216
)


Other


(410
)






(410
)


Restructuring liabilities at December 31, 2008

$



$



$



$
   Consolidation of St. Louis manufacturing/distribution
    facilities
 62




---



##### Table of Contents



ContractTerminationCosts [b]Restructuring liabilities at December 31, 2006

$
465Additions


882Payments


(520
)Restructuring liabilities at December 31, 2007

$
827Additions


50Payments


(308
)Restructuring liabilities at December 31, 2008

$
569   Corporate office relocation
    One-time


ContractTermination


TerminationTotal


Benefits [a]


Costs [b]


Other [c]Restructuring liabilities at December 31, 2006

$
470


$



$
470


$
Additions


2,656



151



2,332



173Reductions


(75
)






(75
)


Payments


(909
)


(151
)


(585
)


(173
)Other


(689
)






(689
)


Restructuring liabilities at December 31, 2007

$
1,453


$



$
1,453


$
Additions


50







50



Payments


(524
)






(524
)


Other


(410
)






(410
)


Restructuring liabilities at December 31, 2008

$
569


$



$
569


$
   [a]
    
    Includes severance, benefits, and other employee-related costs
    associated with the employee terminations. No obligations remain
    at December 31, 2008.[b]
    
    Includes charges related to non-cancelable lease liabilities for
    abandoned facilities, net of potential sub-lease revenue. Total
    maximum potential amount of lease loss, excluding any sublease
    rentals, is $1.5 million as of December 31, 2008. The
    Company has included $0.9 million as an offset for sublease
    rentals.[c]
    
    Includes charges associated with equipment removal and cleanup
    of abandoned facilities. No obligations remain at
    December 31, 2008.   63




---



##### Table of Contents



MaintenanceProductsGroup2009

$
1802010


1882011


201Total Payments

$
569
   Note 19.
    QUARTERLY
    RESULTS OF OPERATIONS (UNAUDITED):    2008

1st Qtr


2nd Qtr


3rd Qtr


4th QtrNet sales

$
41,691


$
45,134


$
44,364


$
36,613Gross profit

$
3,828


$
2,466


$
2,870


$
2,960Net loss

$
(3,434
)

$
(4,215
)

$
(4,953
)

$
(3,880
)Loss per share of common stock  Basic and diluted

$
(0.43
)

$
(0.53
)

$
(0.62
)

$
(0.49
)   2007

1st Qtr


2nd Qtr


3rd Qtr


4th QtrNet sales

$
45,552


$
49,972


$
49,208


$
43,039Gross profit

$
5,596


$
6,640


$
5,539


$
2,479Net (loss) income

$
(3,779
)

$
1,808


$
(810
)

$
1,280(Loss) earnings per share of common stock  Basic and
    diluted

$
(0.48
)

$
0.23


$
(0.10
)

$
0.16   Note 20.
    SUPPLEMENTAL
    BALANCE SHEET INFORMATION    December 31,2008


2007Note receivable  Metal Truck Box

$
1,200


$
600Insurance claim receivable


1,097



50Prepaids


718



1,006Miscellaneous receivables (sale of businesses)






635Other


501



229Total

$
3,516


$
2,520
  64




---



##### Table of Contents



December 31,2008


2007Debt issuance costs, net

$
727


$
1,114Rabbi trust assets


669



1,263Deposits


264



271Note receivable  Metal Truck Box






600Other


149



222Total

$
1,809


$
3,470
     December 31,2008


2007Contingent liabilities

$
7,025


$
8,135Advertising and rebates


2,676



3,377Settlement payment  current


1,500



6,039Professional services


534



843Accrued SARs


440



575Commissions


363



449Non-cancelable lease liabilities  restructuring


219



421Pension and postretirement benefits


208



244Other


1,301



2,242Total

$
14,266


$
22,325
       December 31,2008


2007Settlement payment  long-term

$
4,000


$
Pension and postretirement benefits


2,458



2,462Deferred compensation


1,555



2,211Accrued income taxes  long-term


1,319



2,052Asset retirement obligations


827



829Non-cancelable lease liabilities  restructuring


351



1,019Other


93



133Total

$
10,603


$
8,706
  65




---



##### Table of Contents



Note 21.
    SUPPLEMENTAL
    CASH FLOW INFORMATION    2008


2007


2006Interest

$
1,195


$
4,916


$
5,486Income taxes

$
(93
)

$
2,176


$
1,067
     Note 22.
    VALUATION
    AND QUALIFYING ACCOUNTS  SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS
    YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
    (Amounts in Thousands)
  Balance at


Additions








Balance atBeginning


Charged to


Write-offs


Other


EndAccounts Receivable Reserves

of Year


Expense


to Reserves


Adjustments *


of YearYear ended December 31, 2008Trade receivables

$
261


$
45


$
(19
)

$



$
287Sales allowances


4,289



12,597



(13,559
)






3,327$
4,550


$
12,642


$
(13,578
)

$



$
3,614Year ended December 31, 2007Trade receivables

$
2,213


$
(140
)

$
(85
)

$
(1,727
)

$
261Sales allowances


17,893



13,967



(15,585
)


(11,986
)


4,289$
20,106


$
13,827


$
(15,670
)

$
(13,713
)

$
4,550Year ended December 31, 2006Trade receivables

$
2,445


$
(147
)

$
(155
)

$
70


$
2,213Sales allowances


14,071



14,201



(14,409
)


4,030



17,893$
16,516


$
14,054


$
(14,564
)

$
4,100


$
20,106Balance at


Additions








Balance atBeginning


Charged to


Write-offs


Other


EndInventory Reserves

of Year


Expense


to Reserves


Adjustments


of YearYear ended December 31, 2008

$
1,376


$
85


$
(116
)

$



$
1,345Year ended December 31, 2007

$
3,905


$
(183
)

$
(50
)

$
(2,296
)

$
1,376Year ended December 31, 2006

$
4,548


$
460


$
(486
)

$
(617
)

$
3,905Balance at











Balance atBeginning








Other


EndIncome Tax Valuation Allowances

of Year


Provision


Reversals


Adjustments


of YearYear ended December 31, 2008

$
66,306


$
7,715


$



$



$
74,021Year ended December 31, 2007

$
66,971


$



$
(665
)

$



$
66,306Year ended December 31, 2006

$
64,794


$
2,177


$



$



$
66,971     *
    
    Other adjustments for all periods presented includes net
    activity associated with our businesses disposed in 2007 and
    2006. 66




---



##### Table of Contents



Note 23.
    PROPOSED
    REVERSE STOCK SPLIT  1-for-500
  Schedule 13E-3
 67




---



##### Table of Contents



Item 9.  CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE   Item 9A.  CONTROLS
    AND PROCEDURES  Evaluation
    of Disclosure Controls and Procedures
    Rule 13a-15(b) Rule 13a-15(e)
  Managements
    Report on Internal Control over Financial Reporting
  Rule 13a-15(f).
    Changes
    in Internal Control over Financial Reporting
   Item 9B.  OTHER
    INFORMATION  Form 8-K Form 8-K) Form 8-K
 68




---



##### Table of Contents



Form 8-K.
 69




---



##### Table of Contents



Part III Item 10.  DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE         Item 11.  EXECUTIVE
    COMPENSATION   Item 12.  SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    Equity
    Compensation Plan Information
    Number of SecuritiesRemaining Available forNumber of Securities to


Weighted-average


Future Issuances Under EquityBe Issued on Exercise of


Exercise Price of


Compensation PlansOutstanding Option,


Outstanding Options,


(Excluding SecuritiesPlan Category

Warrants and Rights


Warrants and Rights


Reflected in Column (a))(a)


(b)


(c)Equity Compensation Plans Approved by Stockholders


532,850


$
5.04



Equity Compensation Plans Not Approved by Stockholders


1,687,467


$
2.49



546,063Total


2,220,317







546,063   Equity
    Compensation Plans Not Approved by Stockholders
   70




---



##### Table of Contents



71




---



##### Table of Contents



Item 13.  CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE   Item 14.  PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   72




---



##### Table of Contents



Part IV Item 15.  EXHIBITS,
    FINANCIAL STATEMENT SCHEDULES  (a)
    1.
    Financial Statements  Form 10-K:
  - Consolidated Balance Sheets as of December 31, 2008 and
    2007- Consolidated Statements of Operations for the years ended
    December 31, 2008, 2007 and 2006- Consolidated Statements of Stockholders Equity for
    the years ended December 31, 2008, 2007 and 2006- Consolidated Statements of Cash Flows for the years ended
    December 31, 2008, 2007 and 2006- Notes to Consolidated Financial Statements   2. Exhibits
   SIGNATURES    Dated: March 31, 2009

KATY INDUSTRIES, INC. 
    Registrant    /S/ David
    J. Feldman
    /S/ James
    W. Shaffer
   73




---



##### Table of Contents



POWER OF
    ATTORNEY
      Signature

Title/S/ William F. AndrewsWilliam F. Andrews

Chairman of the Board and Director/S/ David J. FeldmanDavid J. Feldman

President, Chief Executive Officer and Director
    (Principal Executive Officer)/S/ James W. ShafferJames W. Shaffer

Vice President, Treasurer and Chief Financial Officer
    (Principal Financial and Accounting Officer)/S/ Christopher AndersonChristopher Anderson

Director/S/ Robert M. BarattaRobert M. Baratta

Director/S/ Daniel B. CarrollDaniel B. Carroll

Director/S/ Wallace E. Carroll, Jr.Wallace E. Carroll, Jr.

Director/S/ Samuel P. FriederSamuel P. Frieder

Director/S/ Christopher LacovaraChristopher Lacovara

Director/S/ Shant MardirossianShant Mardirossian

Director  74




---



##### Table of Contents



KATY
    INDUSTRIES, INC.
    EXHIBIT INDEX
    DECEMBER 31, 2008  ExhibitNumber

Exhibit Title2


Preferred Stock Purchase and Recapitalization Agreement, dated
    as of June 2, 2001 (incorporated by reference to Annex B to the
    Companys Proxy Statement on Schedule 14A filed June 8,
    2001).

*3
.1

The Amended and Restated Certificate of Incorporation of the
    Company (incorporated by reference to Exhibit 3.1 of the
    Companys Current Report on Form 8-K on July 13, 2001).

*3
.2

The By-laws of the Company, as amended (incorporated by
    reference to Exhibit 3.1 of the Companys Quarterly Report
    on Form 10-Q filed May 15, 2001).

*10
.1

Amended and Restated Katy Industries, Inc. 1995 Long-Term
    Incentive Plan (incorporated by reference to Exhibit 10.1 of the
    Companys Quarterly Report on Form 10-Q filed August 9,
    2006).

*10
.2

Katy Industries, Inc. Non-Employee Director Stock Option Plan
    (incorporated by reference to Katys Registration Statement
    on Form S-8 filed June 21, 1995).

*10
.3

Katy Industries, Inc. Supplemental Retirement and Deferral Plan
    effective as of June 1, 1995 (incorporated by reference to
    Exhibit 10.4 to Companys Annual Report on Form 10-K filed
    April 1, 1996).

*10
.4

Katy Industries, Inc. Directors Deferred Compensation Plan
    effective as of June 1, 1995 (incorporated by reference to
    Exhibit 10.5 to Companys Annual Report on Form 10-K filed
    April 1, 1996).

*10
.5

Employment Agreement dated as of April 21, 2008 between David J.
    Feldman and the Company (incorporated by reference to Exhibit
    10.1 to the Companys Quarterly Report on Form 10-Q filed
    May 13, 2008).

*10
.6

Katy Industries, Inc. 2008 Chief Executive Officers Plan
    (incorporated by reference to Exhibit 10.2 to the Companys
    Quarterly Report on Form 10-Q filed May 13, 2008).

*10
.7

CFO Employment Offer Letter dated as of October 27, 2008 between
    James W. Shaffer and the Company (incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on Form 8-K
    filed October 27, 2008).

*10
.8

Vice President, Sales and Marketing Employment Offer Letter
    dated as of October 27, 2008 between Edward Carter and the
    Company (incorporated by reference to Exhibit 99.2 to the
    Companys Current Report on Form 8-K filed October 27,
    2008).

*10
.9

Katy Industries, Inc. 2008 Chief Financial Officers Plan.

**10
.10

Katy Industries, Inc. 2008 Vice President, Sales and
    Marketings Plan.

**10
.11

Katy Industries, Inc. 2002 Stock Appreciation Rights Plan, dated
    November 21, 2002, (incorporated by reference to Exhibit 10.17
    to the Companys Annual Report on Form 10-K dated April 15,
    2003).

*10
.12

Katy Industries, Inc. Executive Bonus Plan dated December 2001
    (incorporated by reference to Exhibit 10.18 to the
    Companys Annual Report on Form 10-K dated April 15, 2005).

*10
.13

Second Amended and Restated Loan Agreement dated as of November
    30, 2007 with Bank of America, (incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on Form 8-K
    filed December 5, 2007).

*10
.14

Amended and Restated Katy Industries, Inc. 1997 Long-Term
    Incentive Plan (incorporated by reference to Exhibit 10.20 of
    the Companys Quarterly Report on Form 10-Q filed August 9,
    2006).

*10
.15

Stand-Alone Stock Appreciation Rights Agreement (incorporated by
    reference to Exhibit 99.1 of the Companys Current Report
    on Form 8-K filed September 6, 2006).

*10
.16

Director Compensation Arrangements

**21


Subsidiaries of registrant

**23
.1

Consent of Independent Registered Public Accounting Firm

**23
.2

Consent of Independent Registered Public Accounting Firm

** 75




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##### Table of Contents



ExhibitNumber

Exhibit Title31
.1

CEO Certification pursuant to Securities Exchange Act Rule
    13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.

**31
.2

CFO Certification pursuant to Securities Exchange Act Rule
    13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002

**32
.1

CEO Certification required by 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.

**#32
.2

CFO Certification required by 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.

**#     *
    
    Indicates incorporated by reference.**
    
    Indicates filed herewith.#
    
    These certifications are being furnished solely to accompany
    this report pursuant to 18 U.S.C. 1350, and are not being
    filed for purposes of Section 18 of the Securities and
    Exchange Act of 1934, as amended, and are not to be incorporated
    by reference into any filing of Katy Industries, Inc. whether
    made before or after the date hereof, regardless of any general
    incorporation language in such filing. 76