Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number 333-78569

PANOLAM INDUSTRIES INTERNATIONAL, INC.(Exact Name of Registrant as Specified in Its Charter)

Delaware(State or Other Jurisdiction of Incorporation or Organization)

52-2064043(I.R.S. Employer Identification No.)20 Progress Drive, Shelton, Connecticut(Address of Principal Executive Offices)

06484(Zip Code)(203) 925-1556Registrant's Telephone Number, Including Area Code:


Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which RegisteredNone

None


Securities
registered pursuant to Section 12(g) of the Act: None.

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule-405 of the Securities
Act. o Yes    ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Act. o Yes    ý No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. ý Yes    o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.    ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý (Do not check if a smaller
reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). o Yes    ý No

As of June 30, 2008, there was no established public trading market for the shares of the registrant's common stock and no shares of common stock were held
by non-affiliates of the registrant.

The
number of shares outstanding of the registrant's common stock as of March 31, 2009, was 200.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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PANOLAM INDUSTRIES INTERNATIONAL, INC.
FORM 10-K
TABLE OF CONTENTS



PageFORWARD-LOOKING STATEMENTS

1PART I

2Item 1.

Business

2Item 1A.

Risk Factors

11Item 1B.

Unresolved Staff Comments

20Item 2.

Properties

20Item 3.

Legal Proceedings

21Item 4.

Submission of Matters to a Vote of Security Holders

22PART II

22Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

22Item 6.

Selected Financial Data

22Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

25Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41Item 8.

Financial Statements and Supplementary Data

43Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure

43Item 9A(T).

Controls and Procedures

43Item 9B.

Other Information

44PART III

44Item 10.

Directors, Executive Officers and Corporate
Governance

44Item 11.

Executive Compensation

47Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

58Item 13.

Certain Relationships and Related Transactions and Director Independence

60Item 14.

Principal Accountant Fees and Services

62PART IV

64Item 15.

Exhibits and Financial Statement
Schedules

64Signatures

69


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FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements, including, without limitation, statements
concerning the conditions in our industry and our operations, economic performance and financial condition, including, in particular, statements relating to our business and strategy. The words "may,"
"might," "should," "estimate," "project," "plan," "anticipate," "expect," "intend," "outlook," "believe" and other similar expressions are intended to identify forward-looking statements and
information although not all forward-looking statements include these identifying words. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their
dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks
and uncertainties.

In
particular, our business might be affected by uncertainties affecting the decorative overlay industry and construction industry generally as well as the following, among other
factors:



Additional
factors that might cause future events, achievements or results to differ materially from those expressed or implied by our forward-looking statements include those discussed under
"Item 1ARisk Factors." All forward-looking statements are based upon information available to us on the date of this Form 10-K, and we undertake no obligation to
update or revise any forward-looking statements to reflect new information, future events or otherwise.

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PART I

Item 1.    Business

General

Panolam Industries International, Inc., a Delaware corporation organized in 1997 ("Panolam," the "Company," "we," "us" and/or
"our"), is a leading designer, manufacturer and distributor of decorative laminates in the United States and Canada. Our products, which are marketed under the Panolam, Pluswood, Nevamar and Pionite
brand names, are used in a wide variety of commercial and residential indoor surfacing applications, including kitchen and bath cabinets, furniture, store fixtures and displays, and other specialty
applications. Our decorative laminate product offerings also include a fiber reinforced laminate product ("FRL"). In addition to decorative laminates, we manufacture and distribute
industrial laminate products, including Conolite and Panolam FRP, a fiber reinforced product ("FRP"). We produce and market a selection of specialty resins for industrial uses, such as powdered paint,
adhesives and melamine resins for decorative laminate production, custom treated and chemically prepared decorative overlay papers for high pressure laminates, or HPL, and thermally-fused melamine, or
TFM, and a variety of other industrial laminate products such as aircraft cargo liners and bowling lanes.

We
are the only vertically integrated North American manufacturer of both HPL, and TFM (with the exception of particle board production in our TFM business where we purchase
approximately 50% of our needs), and we design, manufacture and distribute our products throughout our principal markets. For the years ended December 31, 2008 and 2007 we generated net sales
of $366.7 million and $424.4 million, respectively. During these periods, our decorative laminates products comprised approximately 87% and 89% of our net sales, respectively.

We
offer an array of decorative and industrial laminate products from premium to commodity grades at a broad range of prices. HPL, TFM, FRL, Leatherlam, FRP, and our engineered laminates
are utilized as durable and economical look-alike substitutes for natural surfacing materials such as wood, stone, leather and ceramic tile. HPL is used in surfacing applications requiring
greater surface wear and impact resistance than applications using TFM. FRL, a proprietary product, is used in surfacing applications requiring greater surface wear, impact resistance and fire
prevention than applications using HPL. FRP is used in the building, trucking and recreational vehicle, or RV, markets. A typical customer or end user of decorative overlays might utilize HPL,
TFM, FRL, FRP or Leatherlam for different surfaces of the same project. Our TFM products consist of a standard palette of over 150 colors, patterns and wood grains. Our HPL products consist of
a standard palette of approximately 500 colors, patterns and wood grains.

We
market and distribute our decorative laminate products through a geographically diverse network of approximately 300 independently owned and operated distributors. For many of our
distributors, we are their exclusive supplier of HPL, TFM or other decorative laminates. In addition, we sell to approximately 700 national and regional original equipment manufacturers, or OEMs, who
buy proprietary designs and customized versions of our products directly. Our products are supported by a dedicated in-house sales force and customer service team.

We
are wholly owned by Panolam Holdings II Co., or Holdings II. The parent of Holdings II, Panolam Holdings Co., or Panolam Holdings, is controlled by
Genstar Capital LLC, or Genstar Capital, and the Sterling Group, whom we refer to collectively as the Sponsors. The Sponsors acquired us on September 30, 2005. We refer to our
acquisition by the Sponsors as the 2005 Acquisition. We manufacture and sell our products through our wholly owned subsidiaries Panolam Industries, Ltd., Panolam Industries, Inc.,
Pioneer Plastics Corporation, Nevamar Holding Corp., Nevamar Holdco, LLC, and Nevamar Company LLC. We acquired Nevamar Holdco, LLC and Nevamar Company, LLC on
March 1, 2006. For additional information regarding the Nevamar acquisition, see

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"Item 7.
Management's Discussion and Analysis of Financial Condition and Results of OperationThe Acquisition of Nevamar."

Financing
for the 2005 Acquisition consisted of the following:



We
refer to the 2005 Acquisition and the financing transactions described above as the 2005 Transactions. For additional information regarding the 2005 Transactions, see "Item 6.
Selected Financial DataFactors Affecting Comparability of ResultsThe 2005 Transactions."

In
connection with our acquisition of Nevamar in March 2006, we amended our Credit Facility to increase the term loan tranche to $215.0 million and to increase the revolving loan
tranche to $30.0 million.

We
suffered a net loss for 2008 of approximately $121.7 million, which is principally attributable to impairment charges related to fixed assets, goodwill and other indefinite
lived intangible assets and to insufficient revenue to cover our relatively high percentage of fixed costs, including the interest costs on our debt and our depreciation expense. We also had a
stockholder's deficit of $27.9 million as of December 31, 2008. During the fourth quarter of 2008, in light of the weakening economy and our concerns about the troubled credit markets,
we borrowed the full amount available under the revolver tranche of the Credit Facility. As a result, we had approximately $43.5 million in cash and cash equivalents and approximately
$193.5 million in principal and interest outstanding under the Credit Facility as of December 31, 2008.

On
February 27, 2009, we received a notice of default from the agent for the lenders under our Credit Facility due to our failure to comply with certain financial and reporting
covenants. On March 31, 2009, we entered into a forbearance agreement (the "Forbearance Agreement") with our lenders pursuant to which they have agreed to forbear exercising any rights and
remedies under the Credit Facility relating to these defaults, including their right to accelerate our payment obligations under the Credit Facility, until the earlier of (i) June 30,
2009, (ii) the occurrence of an event of default under the Forbearance Agreement or (iii) the fulfillment of all obligations under the Forbearance Agreement and the Credit Facility and
the termination of the Credit Facility. The terms of the Forbearance Agreement prohibit us from, among other things, paying the April 1, 2009 interest payment on the Notes. Failure to make such
interest payment is a default under the indenture governing the Notes and entitles the holders of the Notes (after a thirty day grace period) to accelerate our obligations under the Notes. In
addition, if we are unable to restructure or refinance the Credit Facility, our lenders could accelerate our payment obligations under the Credit Facility and, because of cross default provisions, the
holders of our Notes would have the right to accelerate our obligations under the Notes. Based on these acceleration rights, we have reclassified approximately $343.9 million from
long-term debt to current debt as of December 31, 2008.

In
the event that most or all of our obligations under the Credit Facility and Notes become due and payable, we would be unable to fund our payment obligations. We believe that the
consummation of a successful restructuring is critical to our continued viability, and we are in active discussions with

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our
lenders to restructure our debt obligations; however, given the current negative conditions in the economy generally and the credit markets in particular, we cannot give any assurance that we will
be successful in restructuring our debt or finding alternative financing arrangements. We have engaged financial and legal advisors to assist us in these discussions, but if we are unable to find a
timely solution, we may be compelled to file for bankruptcy protection.

Our Products

We primarily design, manufacture, market and distribute decorative laminate products. Our other product offerings, consisting of
specialty resins, decorative overlay papers and industrial laminates, complement our core decorative laminate product lines. We have two reportable segments, decorative laminates and other. Decorative
laminates manufactures and distributes decorative laminates, primarily HPL and TFM, for use in a wide variety of residential and commercial indoor surfacing applications. Our other segment includes
the production and marketing of a variety of specialty resins for industrial uses, custom treated and chemically prepared decorative overlay papers and a variety of other industrial laminates,
including Conolite and Panolam FRP. Our products are manufactured and primarily sold in North America. For information regarding our reportable segments and sales by geographic area, see
Note 17, "Segment Information," to our consolidated financial statements for the years ended December 31, 2008, 2007 and 2006. The following table presents the percentage of net sales
represented by each of our segments for the periods presented:

Year Ended
December 31,2008

2007

2006Decorative laminates


87
%

89
%

89
%Other, net of eliminations


13
%

11
%

11
%Total


100
%

100
%

100
%


We
estimate that our backlog of unfilled orders was $9.8 million and $20.7 million at December 31, 2008 and 2007, respectively. Orders typically fluctuate from
quarter to quarter based on customer demand and general business conditions. Unfilled orders may be cancelled prior to shipment of goods. It is expected that all or a substantial portion of the
backlog will be filled within the next three months. Our business includes sales to distributors, which generally have short lead times and therefore, backlog may not be indicative of future demand
for our products.



We design, manufacture and distribute decorative laminates in the United States and Canada. Our manufacturing process for HPL and TFM
incorporates several distinct steps that require coordination in order to ensure flexibility and short lead times, match product standards and achieve high throughput.



HPL is produced by impregnating papers with melamine and phenolic resins, which are then placed between stainless steel plates in a
multi-opening press and cured under pressure and heat. The number of paper laminations per sheet of laminate varies with the specific type of HPL product being produced, but all have melamine resin on
the surface to create a hard, durable surface. Surface textures can range from very high gloss, smooth surfaces to deeply textured surfaces and surfaces with other special design and performance
features. The HPL product is sold as a laminate, which is then bonded by the customer to a substrate. Other adhesive based overlays consist of a single layer of vinyl, foil or low basis weight paper
that is bonded to a substrate. HPL provides significantly greater surface wear and impact resistance than TFM, but costs approximately twice as much to produce and install.

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Although
adhesive based overlays are cheaper than HPL and TFM, we believe they offer significantly lower performance. HPL is used in commercial and residential indoor surfacing applications, including
countertops and cabinetry, furniture, fixtures and flooring.

We
offer our HPL products in a variety of grades including: (i) standard grade, which is the thickest and most durable HPL product and is used in applications requiring the
highest impact resistance, such as countertops; (ii) post-forming grade, which is thinner than the standard grade and is generally used in applications calling for rounded edges or
contoured surfaces; and (iii) vertical grade, which is our thinnest HPL product and is used in vertical surfaces such as cabinet side panels and other applications that do not require the high
impact resistance offered by thicker HPL. Key applications for horizontal grades include countertops, store fixtures, desks and other furniture. Postforming grades are the next thickest, also designed
for horizontal applications but their thinner composition is more suitable for postforming processes. Vertical grade laminates are thinnest and least expensive but do not have a high level of impact
resistance. Primary applications include wall panels, elevator cabs, and sides of case goods and other furniture. We also offer numerous engineered decorative laminates that are designed to meet
specific physical performance or unusual design requirements such as bowling lanes, chemical and low electrical resistant work surfaces, silk screening for applications such as signage and game boards
and digital printing for table and countertops, as well as aesthetic features such as seamless and pearlescent laminates. Our HPL product lines are available in a standard palette of over
500 colors, patterns and wood grains and are offered in a variety of thicknesses and texture finishes.

Our
HPL product line is marketed under the Pionite and Nevamar brand names. The Nevamar product line has a variety of surface laminate options including: (i) Nevamar ARP Surface
(surface protection laminate); (ii) Chemarmor (chemical resistant laminate); and (iii) fire retardant protection. The Pionite product line has various surface laminate options including:
(i) ChemGard (chemical resistant laminate); (ii) DecoCor (structural stability laminate); and (iii) Hi-wear (scuff and abrasion protection laminate).

Growth
in demand for HPL is driven by its increased use in fixture, furniture and cabinet applications in various industries and commercial settings such as hospitals and schools. HPL
exhibits features such as enhanced durability and impact resistance, which are attractive attributes for furniture applications. The availability of HPL in various textures such as ceramic, wood and
stone is complemented by the lower cost of HPL as compared to authentic materials. Moreover, HPL is easier to maintain than its wood alternatives. In addition, digital printing usage in the
manufacture of decorative laminates enables laminate manufacturers to provide more realistic and vivid patterned laminates to end-users.



TFM, also known as low-pressure laminate, is produced by thermally fusing a melamine impregnated decorative paper overlay
to an engineered wood substrate such as particleboard or, if rounded or shaped edges are required, medium density fiber-board. Our TFM panels are generally laminated on both sides of the substrate.
TFM has significantly better pricing and performance characteristics than adhesive based overlays which, although marginally cheaper, are significantly poorer in terms of quality, finish, wear and
durability. TFM is used as a durable and economical substitute for natural surfacing materials such as wood, stone and ceramic. The product lines consist of a standard palette of over
150 colors. In addition we offer hundreds of customized colors, patterns and wood grains (which are offered in a variety of panel thicknesses) and texture finishes. TFM is sold as premium or
commodity grade. The premium grade consists of a variety of matching wood grains, stone patterns, abstract designs and pseudo-metallic in varying thicknesses. The commodity grade consists primarily of
panels sold in approximately 50 shades of whites, almonds and grays in thicknesses of 5/8" and 3/4". In 2008, approximately 67% of our TFM sales were premium grade
products, which are priced

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higher
than the commodity grades. TFM is used in a wide variety of commercial and residential indoor surfacing applications, including kitchen and bath cabinetry, furniture, fixtures, displays and
other specialty applications. TFM is significantly less expensive than HPL while offering comparable appearance characteristics.

Growth
in demand for TFM is driven by the trend of pairing thermally fused melamine panels (for vertical surfaces and areas requiring less impact resistance) with high pressure laminates
(for horizontal surfaces). Other factors driving growth are technological developments and consumers upgrading to TFM as the relative cost of foils has increased.



FRL, which is a fiber reinforced laminate product, was specifically engineered for wall use. FRL comes in a variety of customized
colors, patterns, and wood grains and is offered in a variety of thicknesses and textured finishes. FRL features a Class A fire rating for flame spread and smoke development, is extremely
durable with high impact strength and is easy to clean and maintain. These features make it attractive for architects, designers and contractors when specifying material for high-traffic,
high-impact commercial installations. Typical environments for FRL include washrooms, supermarkets, fast food restaurants, mass transit facilities, kitchens, hallways and lobbies in
facilities such as schools, hospitals and airports. FRL is available in approximately 600 colors and patterns to coordinate with our Panolam, Nevamar, Pionite and Pluswood product lines. Given
FRL's Class A rating for low smoke emissions, we are also currently working to certify FRL for cruise ships and airplane applications.



We manufacture a variety of industrial laminate product lines. Our current principal industrial laminate product is Conolite; a thin
lightweight laminate currently used for aircraft cargo liners. Conolite is designed to incorporate a combination of impact resistance, low weight, flame resistance, edge bearing strength and
consistent surface characteristics. Continuous laminates are also used for picture frames. Industrial and other specialty laminates excluding fiberglass reinforced plastics, or FRP, accounted for
approximately 3.0% of our sales in 2008.



We commenced production of fiberglass reinforced plastics, or FRP, in our Morristown, Tennessee facility in the fourth quarter of 2007.
FRP is an all-composite product that can resist extreme changes in temperature and humidity without compromising the structure or finish of the product. It is typically manufactured in
standard building product sizes and can be installed on the most common substrates. FRP is available in a range of colors and fits with many interior styles. These products have the ability to be used
both on exterior products such as recreational vehicles and truck trailers as well as on interior products in hospitals, schools and restaurants. Fiberglass Reinforced Plastics accounted for
approximately 2.0% of our sales in 2008.

Our
decorative laminates and industrial laminate products are used in a wide variety of residential and commercial indoor surfacing applications where cost, durability, design,
construction versatility and ease of maintenance are important factors. These applications include kitchen and bath cabinets and

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countertops,
furniture, store fixtures and displays and other specialty products. The following table sets forth frequently used applications:

|                          |  |                                                                                           |  |                                                                                                                                                                       |  |                                                                                                                                           |  |                                                                                                     
|------------------------- |  | ----------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|
|
|Brands                    |  | GRAPHIC GRAPHIC                                                                           |  | GRAPHIC GRAPHIC                                                                                                                                                       |  | GRAPHIC                                                                                                                                   |  | GRAPHIC                                                                                             
|Kitchen and Bath          |  | Countertops
Cabinets                                                                      |  | Countertops                                                                                                                                                           |  |                                                                                                                                           |  |                                                                                                     
|Commercial
    Furniture  |  | Laboratory tops
Game tables
Buffet countertops
Bartops
Salad bars
Cabinets
Workstations   |  | Office and computer
    furniture
Hotel and motel
    furniture
Dormitory furniture
Restaurant furniture
Lockers
Work surfaces
Library shelving and
    study carrels |  |                                                                                                                                           |  |                                                                                                     
|Store Fixtures            |  | Store fixtures and
    displays
Flame-retardant
    fixtures
Dressing room
    partitions |  | Restaurant serving
    stations
Store fixtures and
    displays
Bookcases
Shelving                                                                                    |  |                                                                                                                                           |  |                                                                                                     
|Specialty Products        |  | Bowling lane floors
Mobile home
    interiors
Doors
Windowsills
Moldings
Closets          |  | Speaker cabinets
Gaming cabinets
Jukeboxes
Picture frames
Trade show exhibits
Cabinets and stands
Closets                                                             |  | Washrooms
Supermarkets
Fast food restaurants
Mass transit facilities
Kitchens
Hallways
Lobbies in schools,
    hospitals and
    airports |  | Recreational vehicles
Truck trailers
Interior products in
    hospitals, schools
    and restaurants
|Residential
    Furniture |  | Tabletops
Bedroom suites
Entertainment
    centers
Home office furniture
Night stands     |  | Ready-to-assemble
    furniture
Entertainment
    centers
Bookcases
Wardrobes
Bed frames and
    headboards                                                           |  |                                                                                                                                           |  |                                                                                                     

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We manufacture specialty resins for our own decorative laminate divisions and for sale to customers for industrial uses such as
powdered paint, adhesives and melamine resins for HPL and TFM production. For 2008, external sales of specialty resins accounted for approximately 5.4% of our total sales.



We supply custom saturated decorative overlay papers under the brand name Resopreg to TFM producers and also treat papers provided to
us by our customers. We also manufacture Resopreg saturated decorative overlay papers for internal use in our HPL and TFM production. Sales of decorative overlay papers to outside users accounted for
less than 1.0% of our sales in 2008.

Raw Materials

In 2008, raw material costs accounted for approximately 53% of our cost of goods sold. Three major raw materials are used in our
operations: papers, resins (and the chemicals used to make resins) and raw particleboard. Papers are primarily used in HPL manufacturing and constitute approximately 65% of the total raw materials
used in HPL production. We use papers that are available worldwide from several major sources and many small producers. Our management team has successfully negotiated with our suppliers to keep our
paper prices low over the last four years. Resins consist of three primary raw materials: melamine, phenol and formaldehyde. Most of these
items are petroleum based and prices are therefore tied to oil prices. Since we also sell resin to external parties, resin price increases have both positive and negative effects on us. Purchased raw
particleboard is primarily used for TFM and comprises approximately 70-75% of the product cost. We do not rely on any single supplier for any raw material needs and have experienced no
significant raw material supply problems.

During
2008, we experienced rising raw material costs that may continue to increase in the future. However, price increases have helped to partially offset those increased costs. While
we generally attempt to pass along increased raw material prices to our customers in the form of price increases, there may be a time delay between the increased raw material prices and our ability to
increase the selling prices of our products, or we may be unable to increase the prices of our products due to pricing pressure, decreased demand or other factors, particularly in our TFM product line
where we have been unable to pass all of the price increases through to our customers for competitive reasons.

Sales, Marketing and Distribution

Our sales force and customer service network includes 64 employees who market our existing decorative laminate products. This sales
force includes a team of marketing specification representatives who target furniture designers, architects, cabinet manufacturers, chain store and hotel designers, manufactured home builders and
custom product designers to meet their specifications. Our sales managers market specialty resins, decorative paper and specialty laminate products in conjunction with outside manufacturer
representatives.

In
addition, we market and distribute our products through a geographically diverse network of approximately 300 independently owned and operated distributors (most of which are
exclusive distributors of our various products) that service most major market product lines and geographic regions in the United States and Canada. We also sell products directly to over
approximately 700 national and regional OEM customers. We have a large direct sales force consisting of sales representatives and dedicated in-house customer service employees supporting
distributor and regional OEM sales efforts, as well as sales and regional product managers targeting direct sales to national OEMs.

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Our ability to offer matching decorative laminate products is one of our core value propositions. Approximately 38% of our sales for the twelve months ended
December 31, 2008 were generated through 50 distributors that carry both of our HPL and TFM brand product lines. We offer decorative laminate products through one combined sales force,
conveniently providing customers with one interface.

Customers

We do not depend on any single customer or a particular group of customers. No single customer individually accounted for more than 10%
of our 2008 consolidated revenues. We service a number of diverse, high quality accounts. Our retail customers include CVS, Saks Fifth Avenue and Kohl's. Furniture customers include Herman Miller,
Kitchen Craft Cabinetry, Bush Industries and Steelcase. We maintain strong relationships with other high quality accounts, including The Boeing Company, Brunswick Corporation, QubicaAMF
Worldwide LLC and United Parcel Service of America, Inc.

Competition

The decorative overlay industry is highly competitive. Purchasing decisions are typically based on product quality, price,
lead-time, product line breadth, design leadership, customer service and distribution coverage. The key quality requirements are visual and color consistency and designs that are
responsive to fashion trends. Decorative overlay products also compete on price and performance characteristics with other surfacing products, including low-cost artificial adhesive based
overlays such as vinyls, foils and low-basis weight papers and high-cost natural surfaces such as wood, stone and ceramic tile.

Broad
geographic scope, scale and distribution strength are competitive advantages in the decorative laminate TFM market. While regional, non-integrated manufacturers are
able to compete in the TFM market because shipping is a principal cost component of TFM panels, the largest manufacturers are integrated producers of decorative overlay papers and engineered wood
substrate. Over the past several years, some of our competitors have closed facilities, taking capacity out of the market. We believe that several factors contribute to our strong TFM market position,
including the integrated nature of our manufacturing process and facilities, our broad line of products and the strength of our sales, customer service and distribution resources.

Some
of our competitors have significantly larger and substantially greater financial and other resources than we do. In addition, several of our competitors are fully integrated
producers of decorative overlay papers and raw particleboard, which generally provides them with lower costs for producing their decorative laminate products and makes them less vulnerable to
increases in the price of raw materials. Our products may not continue to compete successfully with the products of our competitors.

New
competitors could enter our markets. It is possible that foreign-based competitors could seek to establish a presence in the United States market. If we cannot compete successfully,
our sales and operating results could be materially and adversely affected.

Intellectual Property

We rely on a combination of patent, trade name, trademark and copyright laws in the United States and other jurisdictions, as well as
employee and third party non-disclosure agreements, license arrangements and domain name registrations, and on unpatented proprietary know-how and other trade secrets, to
protect our products, components, processes and applications. We consider our proprietary information, including the Panolam, Nevamar, Pionite and Pluswood brand names, to be important, especially in
maintaining a competitive position in our markets. Therefore, we take actions to protect our intellectual property rights. With the exception of the brand names Panolam, Nevamar,

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Pionite
and Pluswood, we do not believe any single patent, trademark or trade name is material to our business as a whole. Any issued patents that cover our proprietary technology and any of our other
intellectual property rights may not provide us with adequate protection or be commercially beneficial to us and, if applied for, may not be issued. The issuance of a patent is not conclusive as to
its validity or its enforceability. Competitors may also be able to design around our patents. If we are unable to protect our patented technologies, our competitors could commercialize technologies
or products which are substantially similar to ours.

With
respect to proprietary know-how, we rely on trade secret laws in the United States and other jurisdictions and confidentiality agreements. Monitoring the unauthorized
use of our technology is difficult and the steps we have taken may not prevent unauthorized use of our technology. The disclosure or misappropriation of our intellectual property could harm our
ability to protect our rights and our competitive position.

Our
registered trademarks include: Panolam, Pionite, Conolite, Resopreg, Leatherlam, Nevamar, Pluswood, FRL, Melcor II, DecoCor, Chemarmor and Meluminum.

Research and Development and Product Engineering

We closely integrate new product development with marketing, manufacturing and product engineering to meet the needs of our customers.
We have five employees who work to enhance our existing products and develop new product applications for our growing base of customers who require custom solutions. We believe these capabilities
provide a significant
competitive advantage in the development of decorative laminate products. Our product engineering employees focus on:



Employees

As of December 31, 2008, we employed 1,042 persons (242 salaried and 800 hourly). At our Hampton, South Carolina
facility, 220 hourly employees are represented by the Carpenters East Coast Industrial Council Local Union No. 3130 pursuant to a collective bargaining agreement dated October 1,
2003, which expires on October 1, 2009.

On
August 18, 2008, the National Labor Relations Board certified the International Brotherhood of Teamsters, Local 340, as the exclusive collective-bargaining representative for
248 full time and regular part time production and maintenance employees employed at our Auburn, Maine facility, but excluding all other employees, personnel employed by an outside agency, office
clerical employees, professional employees, guards and supervisors as defined in the National Labor Relations Act. We will negotiate in good faith with the Local 340 until a collective bargaining
agreement is reached.

We
believe that we have a good relationship with our unionized and non-unionized employees.

Environmental and Health and Safety Matters

We are subject to a variety of federal, state, local, foreign and provincial environmental laws and regulations, including those
governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances and wastes and the responsibility to investigate and clean up contaminated sites that
are or were owned, leased, operated or used by us or our predecessors. Many of our operations require environmental permits and controls to prevent and limit air and water pollution. These permits
contain terms and conditions that impose limitations on our manufacturing activities, production levels and associated activities and periodically may be subject to modification,

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renewal
and revocation by issuing authorities. We may face material liability if we fail to comply with environmental laws and regulations. We may also be required to make large capital expenditures
to maintain compliance. From time to time our operations may not be in full compliance with the terms and conditions of our permits. We are also subject to the federal Occupational Health and Safety
Act and similar state and foreign laws which impose requirements and standards of conduct on our operations for the health and safety of our workers. We periodically review our procedures and policies
for compliance with environmental and health and safety requirements. We believe that our operations are generally in compliance with applicable environmental regulatory requirements or that any
non-compliance will not result in a material liability or cost to achieve compliance.

Certain
environmental laws and regulations in the United States, such as the federal Superfund law and similar state laws, impose liability for the entire cost of investigation or
remediation of contaminated sites upon the current site owners, the site owners and operators at the time the contamination occurred, and upon parties who generated wastes or transported or sent those
wastes to an off-site facility for treatment or disposal, regardless of whether the owner owned the site at the time of the release of the hazardous substances or the lawfulness of the
original waste disposal activity. As a practical matter, however, the costs of investigation and remediation are generally allocated among the viable responsible parties. There is or could be
contamination at some of our current or formerly owned or operated facilities, primarily related to historical operations at those sites, for which we could be liable under applicable environmental
laws. To the extent we believe there may be a material risk to human health, safety or the environment, we or other parties who have liability for the environmental conditions at those sites are
addressing, or have plans to address, environmental conditions at certain of those facilities in accordance with applicable environmental laws and regulations. Our costs or liability in connection
with some of those sites cannot be predicted at this time because the potential existence of contamination has not been investigated or not enough is known about the environmental conditions or likely
remedial requirements.

Our
Auburn, Maine facility is subject to a Compliance Order by Consent, or COC, dated May 5, 1993, issued by the State of Maine Department of Environmental Protection, or DEP,
with regard to unauthorized discharges of hazardous substances into the environment. We, along with the previous owners, who are named in the COC, are required to investigate and, as necessary,
remediate the
environmental contamination at the site. Because the unauthorized discharges occurred during the previous ownership, the previous owners have agreed to be responsible for compliance with the COC. The
previous owners have completed and submitted a risk assessment to the state for its review. The financial obligation of the previous owners to investigate and/or remediate is unlimited except with
regard to a portion of the land at our Auburn, Maine facility, which is capped at $10.0 million. We have recorded a liability of $0.7 million at December 31, 2008 and 2007, for
site remediation costs in excess of costs assumed by the previous owners. We could incur additional obligations in excess of the amount accrued and our recorded estimate may change over time. We
expect this environmental issue to be resolved within the next five to ten years.

Item 1A.    Risk Factors

Investors should carefully consider the risk factors set forth below as well as all of the other information contained in this
Form 10-K. If any of the risks occur, our business, financial condition or results of operation could be materially affected.

There is substantial doubt about our ability to continue as a going concern.

As discussed in "Item 1. BusinessGeneral," based on our significant loss in 2008, stockholder's deficit, and our
debt covenant violations there is substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm has included an explanatory

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paragraph
with respect to our ability to continue as a going concern in its report on our consolidated financial statements for the year ended December 31, 2008.

We may be unable to successfully negotiate the restructuring or refinancing of our existing indebtedness, which could have a negative impact on our ability to continue as a
going concern.

We are in violation of certain of our financial covenants under the Credit Facility, which constitutes a default under the Credit
Facility. On February 27, 2009, we received a
notice of default from the agent for the lenders under our Credit Facility due to our failure to comply with certain financial and reporting covenants. On March 31, 2009, we entered into a
forbearance agreement with our lenders pursuant to which they have agreed to forbear exercising any rights and remedies under the Credit Facility relating to these defaults, including their right to
accelerate our payment obligations under the Credit Facility, until the earlier of (i) June 30, 2009, (ii) the occurrence of an event of default under the Forbearance Agreement or
(iii) the fulfillment of all obligations under the Forbearance Agreement and the Credit Facility and the termination of the Credit Facility. The terms of the Forbearance Agreement prohibit us
from, among other things, paying the April 1, 2009 interest payment on the Notes. Failure to make such interest payment is a default under the indenture governing the Notes and entitles the
holders of the Notes (after a thirty day grace period) to accelerate our obligations under the Notes. In addition, if we are unable to restructure or refinance the Credit Facility, our lenders could
accelerate our payment obligations under the Credit Facility and, because of cross default provisions, the holders of our Notes would have the right to accelerate our obligations under the Notes.

In
the event that most or all of our obligations under the Credit Facility and Notes were to become due and payable, we would be unable to fund our payment obligations. We are in active
discussions with our lenders to restructure our debt obligations; however, given the current negative conditions in our industry and the economy generally and the credit markets in particular, we
cannot give any assurance that we will be successful in restructuring our debt or finding alternative financing arrangements. We believe that the consummation of a successful restructuring is critical
to our continued viability. If we are unsuccessful in restructuring our current debt or securing alternative financing arrangements, our liquidity would be adversely impacted and we may elect to file
for bankruptcy protection.

Prolonged economic downturns affecting the general economy, industries we target, or our customers have materially and adversely affected, and could continue to adversely
affect, our business, liquidity and results of operations.

In the United States, decorative laminate sales have historically correlated closely with commercial and residential construction
activity. A significant portion of our net sales is to companies that manufacture cabinetry, store fixtures and furniture for use by the construction industry and, in particular, the residential
housing market and retail industry. Spending on new construction and renovation in both the commercial and residential markets depends, in large part, upon the overall strength of business and
consumer spending, which is linked to the availability of financing for construction activity, which is further linked to the overall health of the economy and the availability of financing (including
for home buyers). Reductions in construction activity, generally, materially reduce the demand for decorative laminates and adversely affect our business. The recent significant downturn in the
construction industry has resulted in a material reduction in demand for decorative laminates which in turn has adversely affected our business. As deterioration in the construction industry and these
markets has continued, our results of operations have suffered. We are currently experiencing, among other things, (i) lower sales volume, (ii) higher product costs, (iii) reduced
margins and (iv) increased pricing pressure from our competitors. We initially felt the effects of deteriorating conditions when demand for our TFM products softened. As conditions have
worsened, we are now

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also
experiencing lower demand for our HPL products. TFM and HPL are part of our decorative overlay segment, which historically has accounted for nearly 90% of our revenues.

We
believe that the slowdown in demand for our HPL and TFM products is due primarily to weaknesses in the commercial and residential markets, respectively. Over the past year, many
residential homebuilders have reported decreases in new home orders, a trend that is exacerbated by the substantial nationwide inventory of homes on the housing market, a growing wave of residential
home foreclosures and limited availability of financing for developers and home buyers alike, and we cannot predict how long these trends will continue. In response to these widespread and continuing
adverse conditions, we may be forced to lower prices and cut costs and improve spending efficiency in an effort to mitigate deterioration in our results of operations and financial condition. We may
not be able to succeed in these efforts in the event of similar downturns in the future, which would have an adverse impact on our revenues, profitability, cash flows and financial condition. Further,
the creditworthiness of our customers may deteriorate. Although to date the commercial construction sector has not experienced the same level of weakness as the residential sector, the slower economy
and tighter lending conditions may cause commercial projects to be increasingly cancelled or deferred. Decreases in overall spending for new construction or renovation in any geographic region in
which we do a substantial amount of business are having and could continue to have a material adverse effect on our financial condition and results of operations and deterioration in the
creditworthiness of our customers could have a material adverse impact on future revenue and liquidity.

If we are able to restructure our indebtedness and continue operations, we will likely require a significant amount of cash to service our indebtedness. Our ability to
generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.

Even though we prepaid $2.0 million of debt during 2008, $20.0 million of debt during 2007, and $24.5 million
during 2006, and met our interest payment obligations throughout those periods, our ability to pay the interest on our substantial indebtedness will depend upon our future operating performance. As a
result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments.

If
we do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as selling assets, reducing
or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our indebtedness will depend on the capital markets and our financial condition at that
time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the
terms of existing or future debt instruments, including our Credit Facility and the indenture governing our Notes, may restrict us from adopting some of these alternatives. Our inability to generate
sufficient cash flow to satisfy our debt service obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect, which could be material on our business,
financial condition and results of operations.

Repayment of our indebtedness is dependent in part on cash flow generated by our subsidiaries.

We conduct a significant portion of our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent in
part on our subsidiaries' ability to generate cash flow and their ability to make that cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or be
permitted to, make distributions that enable us to make payments in respect of our indebtedness, including any replacement of our current indebtedness. Each of our subsidiaries is a distinct legal
entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not

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receive
distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

Any replacement financing we secure will likely contain operating and financial covenants that may restrict our business and financing activities.

The covenants in our current and any future financing agreements may adversely affect our ability to finance future operations, meet
our capital needs or engage in business activities. Our current debt agreements, including our forbearance agreement, contain covenants that restrict our ability to:



We
are currently in violation of our consolidated leverage and interest coverage covenants under our existing Credit Facility.

We operate in a competitive industry and many of our competitors have greater resources than we do, which could permit them to spend more on marketing and research and
development or make them less vulnerable to increases in raw material costs.

The decorative overlay industry is highly competitive. Many of our competitors are owned by larger enterprises and have greater
financial and other resources than us, which could give them a competitive advantage by allowing them to spend more money on marketing and research and development. In addition, because of ongoing
consolidation in our industry, many of our competitors have become larger, and this trend may continue in the future. Some of our competitors have less indebtedness than we do and, therefore, more of
their cash will be available for business purposes other than debt service and they may be more capable of withstanding sustained adverse market conditions. As a result, we may be unable to compete
with other companies in the market during the various stages of the business cycle and particularly during any downturns. There is also no guarantee that our products will continue to compete
successfully with the products of our competitors and, therefore, we may not be able to improve or maintain profit margins or increase sales and market share.

Competition
in the decorative laminate industry has expanded in recent years, particularly with respect to TFM products due, in large part, to the acquisition by certain of our
competitors of the particle board manufacturing businesses of several of our suppliers. As a result, a number of our TFM competitors are more fully vertically integrated than we are in that they are
able to produce all or a majority of their raw particle board requirements, while we are forced to purchase approximately half of our particle board requirements from a decreasing number of suppliers.
This generally provides them with lower costs for producing their competing products and makes them less vulnerable to increases in the price of raw materials. These competitors may also be able to
enjoy greater

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manufacturing
economies of scale, greater energy self-sufficiency and/or lower operating costs than our company.

New
competitors could enter our markets. In addition, existing competitors may decide to increase their marketing efforts to our customers by broadening their product offerings or
competing more aggressively on price. For example, due to the current downturn in the home repair and remodeling and new home construction sectors of the economy, we have recently experienced
increased pricing competition in the commercial customer side of our business from companies that have historically competed with us more heavily on the residential customer side of our business. It
is also possible that foreign-based competitors could seek to establish a presence in the United States market by acquisition or otherwise. If we cannot compete successfully, our sales and operating
results could be materially and adversely affected.

Our business may be affected by changes in customer preferences and discretionary spending.

A portion of our end customers include commercial customers renovating or upgrading office or interior store space and consumers
refacing or replacing kitchen and bathroom countertops and cabinets. Purchasing decisions by both commercial and residential customers are heavily influenced by budgetary considerations or the
availability of financing in the credit markets. Factors affecting such availability include interest rates, demographics, consumer confidence and economic factors generally, all of which are outside
our control. We believe that the combination of challenging conditions in the current housing and credit markets has caused and will continue to cause many customers to cancel, postpone or downsize
previously planned remodeling, expansion and other projects.

Other
factors that strongly affect customer purchasing decisions include product quality, price, lead-time, product line breadth, design leadership, customer service and
distribution coverage. Decorative overlay products also compete on price and performance characteristics with other surfacing products, including low-cost artificial adhesive based
overlays such as vinyls, foils and low-basis weight papers and high-cost natural surfaces such as
wood, stone and ceramic tile. If we are unable to anticipate or react quickly to changes in consumer preferences in these areas, we may lose market share and our results of operations may suffer.

We
also focus on developing new products to support our sales growth. We cannot assure you that any of our new products will be successful, or that they will not erode market share
currently enjoyed by our other products. We will need to devote significant resources to developing and launching new products, and we may not achieve an acceptable return on our investment. If we are
unsuccessful in our efforts to develop new products, we could lose future sales and market share, which would have an adverse impact on our revenues, profitability and cash flows.

We have recently been adversely affected by increased costs of raw materials and purchased energy. Further increases in these costs could continue to adversely affect us.

During 2008, raw materials comprised approximately 53% of our cost of goods sold. Paper, raw particleboard and resin purchases
accounted for nearly all of our raw material spending in 2008. Prices for raw particleboard and chemicals required to make resins increased in 2008 as compared to 2007 due to increased utility costs
and limited production capacities at certain of our suppliers. As the cost of each of these materials increases, we must raise our prices to consumers or cut other costs in order to mitigate the
impact of higher costs on our margins. While we generally attempt to pass along increased raw material prices to our customers in the form of price increases, there may be a time delay between the
increased raw material prices and our ability to increase the prices of our products, or we may be unable to increase the prices of our products due to pricing pressure or other factors. Recently, we
have been largely unable to pass through price increases across certain of our product lines for competitive reasons.

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TFM
and HPL decorative overlays are produced from a few basic raw materials. TFM production uses wood substrate, papers and melamine resins, each of which constitutes approximately
one-third of the required raw materials. Papers constitute approximately 65% of the total raw materials used in HPL production. Resins, including melamine and phenolic resin, constitute
the remaining HPL raw materials. Because resins are petroleum based, their prices are tied to oil prices. As the price of petroleum fluctuated dramatically during the past two years, the price of
resins did as well, and we were unable to adjust the price of our HPL decorative overlay products to protect our margins at the same rate. Accordingly, our margins were negatively affected during 2007
and 2008. The price and availability of our raw materials are generally subject to market conditions affecting supply and demand. Recently, however, price and availability of certain of our raw
materials, including particle board, have also been affected by consolidation amongst our suppliers, including with certain of our competitors, which has resulted in reduced availability and increased
pricing pressure in the market
for particle board. We believe that all of our raw materials are available at current market prices in sufficient quantities and of adequate quality. However, a substantial increase in raw material
prices that we are unable to pass through to our customers or a substantial decrease in raw material supply or quality could continue to have a material adverse effect on our profitability and cash
flow.

Energy
is also one of our most significant costs, and it accounted for approximately 7% of the aggregate amount of our cost of goods sold in 2008. Energy prices, particularly for
electricity, natural gas, and fuel oil, have been volatile in recent years and currently exceed historical averages. These fluctuations impact our manufacturing costs and contribute to earnings
volatility. Increased demand for these fuels (which could be driven by cold weather) or further supply constraints could drive prices higher. The electricity rates charged to us are impacted by the
fluctuation in natural gas prices, although the degree of impact depends on each utility's mix of energy resources and the relevant regulatory situation. Historically, we have been able to
successfully manage increases in the cost of energy by increasing HPL and TFM prices to offset the increased costs and by improving efficiencies in our plants. Due to the volatility of energy costs
during the past year, however, we have been unable to fully pass on these energy costs, resulting in reduced margins on our products. In the event that energy costs increase again and we are unable to
pass all of these costs through to our customers, it could continue to have a material adverse effect on our profitability and cash flow.

We do not generally have any contracts with the ultimate end users of our products or OEMs and they could cease their business relationship with us at any time
without notice.

Although we have contracts with a number of key commercial end-users of our products, a significant number of our
end-users are retail institutions with multiple locations across the United States and Canada who purchase our products from our distributors. We do not have purchase agreements with most
of these end-users. Additionally, we sell our products to OEMs and distributors who generally do not have long-term purchase commitments with us. Although many of our
distributors have arrangements with us whereby we are their exclusive or preferred provider, they are not contractually bound to purchase our products and following the expiration of a notice period
are free to switch their allegiance to another supplier. Accordingly, we have no control over our distributors' purchase decisions and they may switch to and from our products from time to time, and
have done so in the past. Similarly, a significant number of the end users of our products and the OEMs to whom we sell our products directly can freely engage our competitors and slow, cancel
or alter expansion and remodeling projects. Moreover, if a number of our larger end users or OEMs ceased or significantly curtailed operations, it would have a material adverse effect on our
business.

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We might encounter difficulties and barriers that impede our ability to manage our acquisitions throughout diverse geographical markets, which might result in disruptions to
our business and additional expense.

Our long term strategy includes acquisitions, and we may undertake acquisitions with the goal of broadening our product offerings,
operations and distribution base. The integration efforts required in connection with any acquisition we complete, together with our continuing efforts to increase profitability and market share by,
among other things, increasing sales to existing and new distributors, are substantial and might cause disruptions in our operations. These efforts might divert management's attention away from
day-to-day operations, which could cause us to lose or to be delayed in pursuing business opportunities or activities or could impair our relationships with our current
customers, distributors and employees. Also, we could incur unanticipated expenses in connection with these integration activities. Specific risks to our ongoing operations posed by acquisitions we
have completed or that we might complete in the future include:



Our manufacturing operations involve the use, handling, storage, treatment and disposal of materials and waste products that may be toxic or hazardous, and as a result, we
may face environmental liabilities.

As an industrial manufacturer of laminates and surfacing materials, we are subject to numerous federal, state, provincial and local
environmental and occupational health and safety laws and regulations. Our operations are subject to environmental laws and regulations governing waste disposal, air and water emissions, the handling
of hazardous substances, workplace exposure and other matters. Stringent environmental laws and regulations govern the handling and disposal of chemicals and substances, such as solvents and
lubricants, commonly used in some of our manufacturing operations. In addition, certain of our facilities operate, or have operated, above ground and underground storage tanks for fuels and chemical
storage which are subject to a variety of environmental laws and regulations. Failure to comply with environmental laws and regulations may result in a material liability to us in the form of
administrative, civil or criminal enforcement by government agencies or other parties or third party lawsuits. For example, our facility in Hampton, South Carolina, which we acquired in connection
with the Nevamar acquisition, has been the subject of asbestos-related litigation and workers' compensation claims. See "Item 3. Legal Proceedings." Environmental laws and regulations also may
require us to make material capital expenditures to maintain compliance. See "Item 1. BusinessEnvironmental and Health and Safety Matters."

While
we believe that we are in compliance with current environmental laws and regulations and that our reserves are sufficient to cover any known environmental claims related to our
properties, these judgments are based on currently available facts and our historical experience and could prove to be wrong. In addition, future events, such as the adoption of new laws and
regulations, changes in existing laws and regulations or their interpretation, stricter enforcement of existing laws and regulations or governmental or private claims for damage to persons, property
or the environment resulting from our current or former operations, may give rise to additional compliance costs or liabilities that could have a material adverse effect on our business.

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In
addition, releases to the environment of hazardous or toxic wastes or substances, whether at facilities currently or formerly owned or operated by us or at off-site
locations in the United States where we have arranged for disposal of such substances, also may subject us to liability for cleaning up contamination which results from any releases. In some cases,
liability may be imposed without regard to fault or the lawfulness of the original activity that resulted in the contamination. We also may incur liability under the Comprehensive Environmental
Response, Compensation and Liability Act, or CERCLA, for off-site waste disposal.

A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales, and/or negatively impact our net income.

Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations
unexpectedly due to a number of events, including:



Future
events may cause shutdowns, which may result in downtime and/or cause damage to our facilities. Any such downtime or facility damage could prevent us from meeting customer demand
for our products and/or require us to make unplanned capital expenditures. While we maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the
use of all or a portion of one of our manufacturing facilities our ability to meet our production capacity targets and satisfy customer requirements would be impaired, resulting in lower sales and net
income.

We are dependent upon our Chief Executive Officer and other key employees.

Our success depends upon the continued service of our chairman, president and chief executive officer, Robert J. Muller, and other key
employees. We cannot assure you that we will retain our officers and key employees. If Mr. Muller or one or more of our other key employees were to become unavailable to us, this would have an
adverse effect on our business operations and financial condition. We do not presently maintain a "key man" life insurance policy on Mr. Muller. See "Item 11. Executive
Compensation""Employment Agreements" and "Potential Payments Upon Termination or Change of Control," for a description of the employment agreement that we entered into with
Mr. Muller.

Our
future success depends on our continuing ability to hire and keep highly qualified technical and managerial personnel. Competition for qualified personnel in our industry with
relevant experience is intense, and attracting and retaining such personnel could be difficult.

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Genstar Capital and The Sterling Group control our company and their interests may conflict with those of other investors.

Genstar Capital, The Sterling Group and their respective affiliates, or the Sponsors, can control the election of our directors, the
appointment of members of management and the approval of all actions requiring the approval of the holders of our common stock, including adopting amendments to our certificate of incorporation and
approving mergers, acquisitions or sales of all or substantially all of our assets. The interests of the Sponsors could conflict with the interests of the holders of the notes. For example, as we
encounter financial difficulties or if we are unable to pay our debts as they become due, the interests of the Sponsors as our ultimate controlling stockholders might conflict with the interests of
the holders of the notes. The Sponsors may also have interests in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risks to holders of the notes.

Our results may fluctuate based on exchange rates between U.S. and Canadian dollars.

We incur certain costs in Canadian dollars relating to our Canadian manufacturing subsidiary which could result in various factors,
including fluctuations in currency exchange rates, having an adverse effect on our results of operations. On a consolidated basis, our TFM net sales tend to be evenly split between U.S. and Canadian
customers but may shift depending on market demand. However, a significant amount of raw materials purchases made by our Canadian subsidiary are in Canadian dollars. We also incur labor and other
operating costs at our Canadian subsidiary in Canadian dollars and make sales to Canadian customers in Canadian dollars. The net assets, net sales and cash flows from our wholly owned Canadian
subsidiary are based on the U.S. dollar equivalent of such amounts measured in Canadian dollars. As a result, our Canadian subsidiary has the potential to impact our financial position due to
fluctuations in the Canadian dollar arising from the process of re-measuring the local functional currency in the U.S. dollar. Any increase in the value of the U.S. dollar in relation to
the Canadian dollar will adversely affect our revenues from our Canadian subsidiary when translated into U.S. dollars. We currently do not enter into any derivative financial instruments to reduce our
exposure to foreign currency exchange rate risk. There can be no assurances that the foreign exchange rate with Canada will not fluctuate adversely in the future and the potential risk for translation
losses is not quantifiable.

Our
Canadian customers may also be affected by the impact of currency fluctuations to the extent that they purchase our products in Canadian dollars and then sell into the United States.
In such a case, an increase in the value of the Canadian dollar in relation to the U.S. dollar will adversely affect their financial results by decreasing their revenues when translated into Canadian
dollars in comparison to their cost of goods, and could cause them to delay or reduce the size of their purchases of our products, which could adversely affect our results of operations.

We may not be able to protect our intellectual property rights, brands or proprietary technology effectively.

We rely on a combination of patent, trademark, domain name registration, copyright and trade secret laws in the United States and other
jurisdictions, as well as third party nondisclosure, employee and consultant assignment and other agreements in order to protect our proprietary technology and rights. Our Panolam, Pionite, Nevamar
and Pluswood trademarks and trade names are an integral part of our business model.

We
cannot assure you that any of our applications for protection of our intellectual property rights will be approved and, if issued, maintained, that others will not infringe upon or
challenge our intellectual property rights or that any such challenges will not be successful. We also rely on unpatented proprietary technology. It is possible that others will independently develop
the same or similar technology or otherwise obtain access to our unpatented technology. In addition, in the ordinary

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course
of our operations, from time to time, we pursue potential claims relating to the protection of certain products and intellectual property rights, including with respect to some of our more
profitable products. These claims could be time consuming, expensive and divert resources. If we are unable to maintain the proprietary nature of our technologies or proprietary protection of our
brands, our ability to market or be competitive with respect to some or all of our products may be affected, which could reduce our sales and profitability.

Item 1B.    Unresolved Staff Comments

Not applicable.

Item 2.    Properties

We produce TFM at four of our manufacturing facilities. HPL, FRL and Leatherlam are produced at two manufacturing facilities. We
currently are operating below 50% capacity due to the downturn in sales related to current economic conditions. In 2008, capital spending comprised less than 1% of our sales.

HPL
can be shipped nationwide readily and at lower cost than TFM, because HPL overlays weigh significantly less, as they are adhesive bonded to the substrate by the customer after
delivery. We serve the HPL market from our Hampton, South Carolina and Auburn, Maine manufacturing facilities and through our distribution centers in Elkhart, Indiana, Rancho Cucamonga, California,
Conyers, Georgia, Shelton, Connecticut and Dallas, Texas. Our TFM manufacturing facilities are located near raw material supply sources and are well positioned to service their respective geographic
markets, which include southeastern and south central Canada and the northeastern and north central United States (Huntsville, Ontario and Oshkosh, Wisconsin facilities), the southeastern United
States (Norcross, Georgia facility) and the western United States and Canada (Albany, Oregon facility).

The
following table lists all of our active facilities as of December 31, 2008 and indicates the location, principal use, square footage and whether the facilities are owned or
leased. Obligations under our Credit Facility are secured by all of our assets, including our owned properties.

Location

Owned/
Leased

Principal Use

Square FeetShelton, Connecticut

Leased

Corporate headquarters


19,000Huntsville, Ontario

Owned

TFM manufacturing (integrated)


400,000Oshkosh, Wisconsin

Owned

TFM manufacturing


360,000Albany, Oregon

Owned

TFM manufacturing


170,000Norcross, Georgia

Leased

TFM manufacturing


106,000Auburn, Maine

Owned

HPL, FRL, Leatherlam, specialty resin and treated paper


620,000Hampton, South Carolina

Owned

HPL manufacturing


825,000Morristown, Tennessee

Owned

Manufacturing of industrial laminate, Conolite and FRP


185,000Rancho Cucamonga, California

Leased

Re-distribution


97,000Shelton, Connecticut

Leased

Re-distribution


79,000Conyers, Georgia

Leased

Re-distribution


110,000Elkhart, Indiana

Leased

Re-distribution


156,800Dallas, Texas

Leased

Re-distribution


58,000Montevideo, Minnesota

Owned

Distribution center


30,000


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The
following table lists the operations that have been shut down and/or consolidated into other manufacturing and re-distribution locations during 2007 and 2008 and the
current status of the location.

Location

Owned/
Leased

Principal Use

Current Status

Square
FeetChino, California

Leased

TFM manufacturing

Plant closed in 2007 and the lease expires on June 30, 2011. The property is currently being sublet.


97,000Elkhart, Indiana

Leased

Re-distribution

Distribution center was consolidated into a new Elkhart distribution center in 2007. The lease expires March 31, 2010 and the property is currently being sublet.


54,000Aurora, Illinois

Leased

Re-distribution

Distribution center was consolidated into a new Elkhart distribution center in 2007. The lease expired August 30, 2007.


97,000Reno, Nevada

Leased

Re-distribution

Distribution center was consolidated into the Rancho Cucamonga distribution center in 2007. The lease expired September 30, 2008.


22,000Dallas, Texas

Leased

Re-distribution

Distribution center was consolidated into a new Dallas distribution center in 2007. The lease expired February 29, 2008.


31,000Westampton, New Jersey

Leased

Re-distribution

Distribution center was consolidated into a new Shelton, CT distribution center in August 2008. The lease expired August 31, 2008.


80,000


Item 3.    Legal Proceedings

On November 21, 2008, we entered into a settlement agreement with International Paper Company to settle all of these workers'
compensation claims related to a suit involving Nevamar Company LLC, which we described in our Annual Report on Form 10-K for the year ended December 31, 2007. The workers' compensation
claims covered by this settlement agreement include any related claims that are filed by any person who was previously employed, is currently employed or becomes employed by Nevamar on or before
December 31, 2008. Employees hired by
Nevamar after December 31, 2008 and who file claims related to alleged exposure to asbestos are not covered by the settlement agreement. On November 24, 2008 we paid the lump sum
settlement amount, which we had fully reserved.

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We are party to other litigation matters involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal
and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, our ultimate costs with respect to such matters, if any, will
not have a material adverse effect on our business, financial condition, results of operations or cash flows.

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the last quarter of the year ended December 31, 2008.

PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of March 31, 2009, Panolam Holdings II Co. was the holder of record of all the shares of common stock, par value, $.01
per share of Panolam Industries International, Inc. (the "Panolam Industries International, Inc. Common Stock"). Also as of March 31, 2009, Panolam Holdings Co. was the
holder of record of all the shares of common stock, par value, $.01 per share, of Panolam Holdings II Co. (the "Panolam Holdings II Co. Common Stock"). There is no established trading
market for the Panolam Industries International, Inc. Common Stock or the Panolam Holdings II Co. Common Stock. Panolam Industries International, Inc. has never paid or declared a
cash dividend on the Panolam Industries International, Inc. Common Stock, and Panolam Holdings II Co. has never paid or declared a cash dividend on Panolam Holdings II Co. Common
Stock. Furthermore, Panolam Industries International, Inc. is restricted from paying dividends under the covenants of the Credit Facility and the indenture governing the Notes. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources." Panolam Industries International, Inc. does
not have any compensation plans under which its equity securities are authorized for issuance.

As
of March 31, 2009, Panolam Holdings Co. was authorized by its Certificate of Incorporation to issue 180,000 shares of common stock, par value $.01 per share (the
"Panolam Holdings Co. Common Stock") of which 159,900 shares were outstanding. A group of investors led by the Sponsors and certain current members of our management, totaling 13 holders, own
substantially all of the Panolam Holdings Co. Common Stock. There is no established trading market for the Panolam Holdings Co. Common Stock.

Item 6.    Selected Financial Data

Our predecessor company for the period from January 1, 2004 to September 30, 2005 is the business as it existed before
the 2005 Transactions. We completed the 2005 Transactions as of September 30, 2005, and as a result of adjustments to the carrying value of assets and
liabilities resulting from the 2005 Transactions, the financial position and results of operations for periods subsequent to the 2005 Transactions may not be comparable to those of our predecessor
company.

The
following table sets forth selected historical and other consolidated financial and other operating data for Panolam and its consolidated subsidiaries. Dollar figures presented in
the table are in thousands. The statement of operations and other operating data as of the year ended December 31, 2004 and for the nine months ended September 30, 2005 has been derived
from the audited financial statements of our predecessor company. The statement of operations and other operating data, for, and as of, the period October 1, 2005 to December 31, 2005
and for the years ended December 31, 2006, December 31, 2007 and December 31, 2008, have been derived from the audited consolidated financial statements of our successor company
for those periods. The information set forth below should be read

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in
conjunction with the information under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related
notes and other financial information included elsewhere in this Annual Report on Form 10-K.

SuccessorPredecessorPeriod October 1, 2005 to December 31, 2005Year Ended December 31, 2004

Nine Months Ended September 30, 2005

Year Ended December 31, 2006

Year Ended December 31, 2007

Year Ended December 31, 2008Statement of Operations DataNet sales

$
280,662

$
219,856

$
68,371

$
460,078

$
424,397

$
366,709Cost of goods sold


215,245


168,350


55,413


357,494


333,529


305,017Fixed asset impairment charge(1)

















5,165Gross profit


65,417


51,506


12,958


102,584


90,868


56,527Selling, general and administrative expenses


28,927


25,827


8,429


52,783


51,271


48,943Goodwill and other indefinite lived intangible impairment charges(2)

















121,612Other, net(3)


11,532














Transaction expenses(4)





6,685


263








Income (loss) from operations


24,958


18,994


4,266


49,801


39,597


(114,028
)Interest expense(5)


14,688


20,693


6,918


35,577


34,891


29,438Interest income


(87
)

(140
)

(68
)

(628
)

(612
)

(485
)Income (loss) before income tax (benefit) expense


10,357


(1,559
)

(2,584
)

14,852


5,318


(142,981
)Income tax (benefit) expense


4,282


996


(589
)

3,959


(3,006
)

(21,325
)Net income (loss)

$
6,075

$
(2,555
)
$
(1,995
)
$
10,893

$
8,324

$
(121,656
)




SuccessorPredecessor

Period October 1, 2005 to December 31, 2005Year Ended December 31, 2004

Year Ended December 31, 2006

Year Ended December 31, 2007

Year Ended December 31, 2008Balance Sheet Data (at period end):Cash and cash equivalents

$
2,443

$
6,873

$
10,849

$
10,744

$
43,452Total assets


294,276


480,656


571,742


566,359


412,283Total debt


209,185


284,787


339,814


319,941


343,950Stockholder's equity (deficit)


46,182


77,755


88,941


115,962


(27,879
)


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SuccessorPredecessorPeriod October 1, 2005 to December 31, 2005Year Ended December 31, 2004

Nine Months Ended September 30, 2005

Year Ended December 31, 2006

Year Ended December 31, 2007

Year Ended December 31, 2008Other Financial Data:Capital expenditures

$
3,981

$
3,567

$
5,174

$
12,619

$
8,838

$
3,407Ratio of earnings to fixed charges(6)


1.7x


0.9x


0.6x


1.4x


1.1x


(3.7)xEarnings to fixed charges deficiency




$
1,559

$
2,584







$
142,981


---

Factors Affecting Comparability of Results



On September 30, 2005, through a series of mergers and related transactions, Panolam Holdings Co. acquired the business
formerly conducted by Panolam Industries Holdings, Inc. (which was controlled by affiliates of The Carlyle Group) for aggregate cash consideration of $347.5 million, less funded debt at
closing and certain expenses of the transaction. The 2005 Acquisition was accounted for using the purchase method of accounting.

Panolam
Holdings Co. is controlled by the Sponsors.

Financing
for the 2005 Acquisition consisted of the following:



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At
September 30, 2005, the total capitalized debt acquisition costs related to the 2005 Transactions were $11.5 million, of which $5.2 million related to the
issuance of our Notes and $6.3 million related to the Credit Facility. During the period October 1, 2005 through December 31, 2005, we capitalized an additional
$0.3 million of financing costs, $0.2 million related to our Notes and $0.1 million related to the Credit Facility. In addition, as of September 30, 2005, we incurred
expenses related to the 2005 Transactions of $19.4 million. Of that amount, $5.0 million was included in selling, general and administrative expenses as compensation expense,
$1.5 million of early payment penalty fees on the previous credit facility and the write-off of capitalized financing costs of $6.2 million were included in interest expense
and the remaining $6.7 million was included on the statement of operations as transaction expenses. During the period October 1, 2005 through December 31, 2005, we incurred an
additional $0.3 million of transaction expenses. The capitalized portions related to the financing will be amortized over the life of our Notes or Credit Facility, as appropriate.

In
connection with the 2005 Acquisition and change of control, purchase accounting was applied, and all assets were revalued and goodwill recorded, based on valuations and other studies.
As such, the value of intangibles (both definite and indefinite lived), goodwill and property, plant and equipment increased significantly. The increase in the valuation of the definite lived
intangible asset and the property, plant and equipment, as well as the increase in debt acquisition costs, will increase the depreciation and amortization expense and cost of sales considerably as
compared to prior periods.

For
a discussion of certain other factors affecting our results, see "Item 7. Management's Discussion and Analysis of Financial ConditionFactors Affecting our
Results."

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis should be read in conjunction with our audited consolidated financial statements
for the fiscal years ended December 31, 2008, 2007 and 2006 and the notes to those consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The statements in the discussion and analysis regarding our expectations for the performance of our business, our liquidity and capital resources and the other non-historical statements in
the discussion and analysis are forward-looking statements. Our actual results may differ from those contained in or implied by the forward-looking statements. All references in this Management's
Discussion and Analysis of Financial Condition and Results of Operations to "fiscal year" are to the twelve months ended December 31 of the year referenced.

Overview

We are a leading designer, manufacturer and distributor of decorative laminates in the United States and Canada. Our products, which
are marketed under the Panolam, Pluswood, Nevamar and Pionite brand names, are used in a wide variety of commercial and residential indoor surfacing applications, including kitchen and bath cabinets,
furniture, store fixtures and displays, and other specialty applications. Our decorative laminate product offerings also include a fiber reinforced laminate product ("FRL"). In addition to decorative
laminates, we manufacture and distribute industrial laminate products, including Conolite and Panolam FRP, a fiber reinforced product ("FRP"). We produce and market a selection of specialty resins for
industrial uses, such as powdered paint, adhesives and melamine resins for decorative laminate production, custom treated and chemically prepared decorative overlay papers for high pressure laminates,
or HPL, and thermally-fused melamine, or TFM, and a variety of other industrial laminate products such as aircraft cargo liners and bowling lanes.

We
are the only vertically integrated North American manufacturer of both HPL and TFM (with the exception of particle board production in our TFM business where we purchase approximately
50%

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of
our needs), and we design, manufacture and distribute our products throughout our principal markets. For the years ended December 31, 2008 and 2007, we generated net sales of
$366.7 million and $424.4 million, respectively. During these periods, our decorative laminates products comprised approximately 87% and 89% of our net sales, respectively.

We
offer an array of decorative and industrial laminate products from premium to commodity grades at a broad range of prices. HPL, TFM, FRL, Leatherlam, fiber reinforced plastic, or FRP,
and our engineered laminates are utilized as durable and economical look-alike substitutes for natural surfacing materials such as wood, stone, leather and ceramic tile. HPL is used in
surfacing applications requiring greater surface wear and impact resistance than applications using TFM. FRL, a proprietary product, is used in surfacing applications requiring greater surface wear,
impact resistance and fire prevention than applications using HPL. FRP is used in the building, trucking and recreational vehicle, or RV, markets. A typical customer or end user of decorative overlays
might utilize HPL, TFM, FRL, FRP or Leatherlam for different surfaces of the same project. Our TFM products consist of a standard palette of over 150 colors, patterns and wood grains. Our HPL products
consist of a standard palette of approximately 500 colors, patterns and wood grains.

We
market and distribute our decorative laminate products through a geographically diverse network of approximately 300 independently owned and operated distributors. For many of our
distributors, we are their exclusive supplier of HPL, TFM or other decorative laminates. In addition, we sell to approximately 700 national and regional original equipment manufacturers, or OEMs, who
buy proprietary designs and customized versions of our products directly. Our products are supported by a dedicated in-house sales force and customer service team.

For
additional background on certain general economic factors impacting our results, see the discussion of risk factors relating to economic downturns, disruptions in the capital and
credit markets, and fluctuations in the cost of raw materials in "Item 1A. Risk FactorsRisks Relating to Our Business."

Deteriorating Market Conditions and Impact on Financial Condition

In the United States, decorative laminate sales have historically correlated closely with commercial and residential construction
activity. A significant portion of our net sales is to companies that manufacture cabinetry, store fixtures and furniture for use by the construction industry
and, in particular, the residential housing market and retail industry. Spending on new construction and renovation in both the commercial and residential markets depends, in large part, upon the
overall strength of business and consumer spending, which is linked to the availability of financing for construction activity, which is further linked to the overall health of the economy and the
availability of financing (including for home buyers). Reductions in construction activity, generally, materially reduce the demand for decorative laminates and adversely affect our business. The
recent significant downturn in the construction industry has resulted in a material reduction in demand for decorative laminates which in turn has adversely affected our business. As deterioration in
the construction industry and these markets has continued, our results of operations have suffered. We are currently experiencing, among other things, (i) lower sales volume, (ii) higher
product costs, (iii) reduced margins and (iv) increased pricing pressure from our competitors. We initially experienced the effects of deteriorating conditions when demand for our TFM
products softened. As conditions have worsened, we are now also experiencing lower demand for our HPL products.

We
believe that the slowdown in demand for our HPL and TFM products is due primarily to weaknesses in the commercial and residential markets, respectively. Over the past year, many
residential homebuilders have reported decreases in new home orders, a trend that is exacerbated by the substantial nationwide inventory of homes on the housing market, a growing wave of residential
home foreclosures and limited availability of financing for developers and home buyers alike. We

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cannot
predict how long these trends will continue. In response to these widespread and continuing adverse conditions, we may be forced to lower prices and cut costs and improve spending efficiency in
an effort to mitigate deterioration in our results of operations and financial condition.

During
the fourth quarter of 2008, in light of the weakening economy and our concerns about the troubled credit markets, we borrowed the full amount available under the revolver tranche
of our Credit Facility. As a result, we had approximately $43.5 million in cash and cash equivalents and approximately $193.5 million in principal and interest outstanding under our
Credit Facility as of December 31, 2008.

On
February 27, 2009, we received a notice of default from the agent for the lenders under our Credit Facility due to our failure to comply with certain financial and reporting
covenants. On March 31, 2009, we entered into a forbearance agreement with our lenders pursuant to which they have agreed to forbear exercising any rights and remedies under the Credit Facility
relating to these defaults, including their right to accelerate our payment obligations under the Credit Facility, until the earlier of (i) June 30, 2009, (ii) the occurrence of
an event of default under the Forbearance Agreement or (iii) the fulfillment of all obligations under the Forbearance Agreement and the Credit Facility and the termination of the Credit
Facility. The terms of the Forbearance Agreement prohibit us from, among other things, paying the April 1, 2009 interest payment on the Notes. Failure to make such interest payment is a default
under the indenture governing the Notes and entitles the holders of the Notes (after a thirty day grace period) to accelerate our obligations under the Notes. In addition, if we are unable to
restructure or refinance the Credit Facility, our lenders could accelerate our payment obligations under the Credit Facility and, because of cross default provisions, the holders of our Notes would
have the right to accelerate our obligations under the Notes. Based on these acceleration rights, we have reclassified
approximately $343.9 million from long-term debt to current debt as of December 31, 2008.

In
the event that most or all of our obligations under our Credit Facility and Notes become due and payable, we would be unable to fund our payment obligations. The failure to meet those
obligations would have a material adverse effect on our operations and the interests of our creditors and stockholders. We believe that the consummation of a successful restructuring is critical to
our continued viability, and we are in active discussions with our lenders to restructure our debt obligations; however given the current negative conditions in the economy generally and the credit
markets in particular, we cannot give any assurance that we will be successful in restructuring our debt or finding alternative financing arrangements. We have engaged financial and legal advisors to
assist us in these discussions, but if we are unable to find a timely solution, we may be compelled to file for bankruptcy protection.

Please
see Note 11 to our consolidated financial statements for additional information with respect to our Credit Facility and Notes.

Factors Affecting Our Results



We generate our revenue primarily from the sale of our decorative laminates and, to a lesser extent, specialty resins, industrial
laminates and decorative overlay papers in the United States and Canada. In recent periods, consistent with our continuing strategy, we have concentrated on selling finished laminated end products for
their proprietary designs rather than marketing treated papers that could ultimately be used to compete against our own finished laminated products. Our focus is on high-end premium
grades, such as abstract and wood grain patterned laminates that command higher prices and generate higher profit margins. For the year ended December 31, 2008, approximately 92% of our HPL
sales and 67% of our TFM sales were premium grade.

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We
have historically experienced higher sales in the second and third quarters of each year compared with the first and fourth quarters due primarily to seasonal fluctuations in demand.
However, second, third and fourth quarter sales were lower than the first quarter this year due primarily to soft market conditions resulting from the deteriorating general economy. From time to time,
we have curtailed manufacturing operations to make necessary repairs and to maintain efficiencies during slowdowns in order flow.

Changes
in our revenues from sales of our decorative laminates and industrial laminate products from period to period are affected by the following, among other
factors:





Our cost of goods sold consists primarily of raw materials, most of which is paper, raw particle board and resin, and energy costs for
oil, natural gas and electricity, which generally are variable, and to a lesser extent, direct labor and overhead. Our costs of sales are directly affected by changes in prices for these raw
materials, as well as by changes in energy costs and oil
prices which affect the price of the petroleum based products that we use to manufacture resins. Recently, the prices of these raw materials have increased and may continue to increase in the future.
While we generally attempt to pass along increased raw material prices to our customers in the form of price increases, there may be a time delay between the increased raw material prices and our
ability to increase the selling prices of our products, or we may be unable to increase the prices of our products due to pricing pressure, decreased demand or other factors, particularly in our TFM
product line where we have been unable to pass all of the price increases through to our customers for competitive reasons. Similarly, we have instituted certain surcharges on our customers from time
to time to reflect increases in our transportation or distribution costs.



Our gross profit for the year ended December 31, 2008 decreased in comparison to the twelve months ended December 31,
2007. The decrease in gross profit is primarily the result of the decreased sales volume experienced in 2008 as a result of deteriorating economic conditions coupled with rising energy costs as well
as higher raw material costs especially those which are chemical and petroleum based. In addition, we incurred a fixed asset impairment charge of approximately $5.2 million relating to our
Norcross, Georgia plant that also negatively impacted our 2008 gross profit margin. We include certain costs such as distribution costs in our selling, general and administrative expenses.
Accordingly, our gross profit may not be comparable to other companies that include such costs in their cost of goods sold.

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Selling, general and administrative expenses consist of all costs incurred in connection with the sales and marketing of our products,
including distribution and warehousing costs and all administrative costs. The major items included in sales and marketing expenses are:



Changes
in sales and marketing expenses as a percentage of our revenue may be affected by a number of factors, including changes in sales prices and /or volumes, as higher sales prices
and/or volumes enable us to spread the fixed portion of our sales and marketing expenses over higher sales revenue. Sales and marketing expenses may increase from time to time due to advertising or
marketing expenses associated with new product or enhanced product introductions and promotions and higher commissions paid to our sales force for achieving certain targets.

Administrative
expenses include management salary, payroll and benefits costs, stock-based compensation expense, rent, legal and environmental compliance fees and other administrative
and overhead costs. We also incurred significant additional administrative related costs in both 2008 and 2007 in connection with the preparation of a registration statement related to our Notes in
October 2007 and the related ongoing auditing and Sarbanes-Oxley 404 compliance costs associated with being a public reporting company. Administrative expenses also include management fees accrued and
paid to the Sponsors.



Depreciation costs relate to the depreciation of property, plant and equipment. For financial reporting purposes, we calculate
depreciation on a straight-line basis over the expected useful life of each class of asset. Depreciation expense related to our manufacturing processes and administrative functions is
included in the consolidated statement of operations in cost of goods sold and selling, general and administrative expenses, respectively.

Amortization
costs relate to the amortization of intangible assets, which consist primarily of key customer lists, patents and trademarks. We calculate amortization on a
straight-line basis over the expected useful life of the asset, with each identifiable asset assessed individually. Key customer lists, patents and trademarks are amortized over their
respective estimated useful lives to their estimated residual values. These useful lives generally range from 3 to 15 years.



Interest expense consists of interest on our outstanding indebtedness and the amortization of debt acquisition costs and other
financial income and expenses. Interest income consists primarily of interest earned on cash balances in our bank accounts.



Income tax (benefit) expense is incurred at the U.S. federal, and state level as well as the Canadian federal and provincial level. Our
effective tax rates for the years ended December 31, 2008, 2007 and 2006 were approximately 15%, (57)% and 27%, respectively.

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On March 1, 2006, Panolam Industries International, Inc. acquired all of the outstanding equity securities of Nevamar
Holdco, LLC, the parent of Nevamar Company, LLC, a manufacturer of decorative surface products. Nevamar is included in our results beginning on March 1, 2006. The Nevamar
acquisition was accounted for using the purchase method of accounting. Nevamar designs and sells decorative laminates and other surfacing materials used in the commercial and residential furniture,
fixtures and cabinet markets, as well as the graphic arts industry. The total consideration paid for Nevamar was $80.0 million, consisting of $75.0 million in cash and the issuance by
Panolam Holdings Co. to the sellers of $5.0 million of junior subordinated notes. At the time of closing, $1.0 million of the purchase price was put into an escrow account, which
was ultimately returned to us in the form of a working capital adjustment pursuant to the acquisition agreement. In addition, we incurred $3.9 million in closing costs related to the Nevamar
acquisition. At closing we issued junior subordinated notes to the sellers against which it could offset certain amounts that would be added to it in the event we asserted a claim for indemnification
under the acquisition agreement. At December 31, 2007, we had offset approximately $0.1 million in claims against the junior subordinated notes. In January 2008, we settled the junior
subordinated notes with the sellers for approximately $2.4 million, and as part of the settlement agreement, we are no longer indemnified by the sellers for certain claims. As a result of the
settlement, the intercompany payable to our parent, Panolam
Holdings Co., was no longer outstanding as of December 31, 2008 and we recorded liabilities in accrued liabilities and other liabilities in anticipation of such unindemnified claims. In
addition, we incurred $0.1 million in legal and bank fees related to this settlement. In connection with the Nevamar acquisition, we expanded our Credit Facility and borrowed an additional
$80.0 million of long-term debt. Debt acquisition costs related to the $80.0 million term loan totaled $2.8 million. See Note 9, "Debt Acquisition Costs" to our
consolidated financial statements for a discussion of the amortization of our debt acquisition costs.

Critical Accounting Policies

Critical accounting policies are those that require the application of management's most difficult, subjective, or complex judgments,
often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. The preparation of our condensed consolidated financial
statements require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures at the date of our condensed consolidated
financial statements. Management bases its estimates and judgments on historical experience and current market conditions and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates, however,
routinely require adjustment based on changing circumstances and the receipt of new or better information, and actual results may differ from these estimates under different assumptions or conditions.
Management considers the Company's policies on revenue recognition, adjustments for slow moving and obsolete inventories, potentially uncollectible accounts receivable, accruals for customer rebates,
income taxes, goodwill, intangible assets and long-lived assets and stock options to be critical accounting policies due to estimates, assumptions, and application of judgment involved in
each.

Actual
results may differ from management's estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to
those of companies in similar businesses.



We recognize revenues upon shipment of products to customers, at which time, the price is fixed and determinable, collectibility is
reasonably assured and all the provisions agreed to in the

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arrangement
necessary for customer acceptance have been fulfilled. The date of shipment corresponds to the date upon which the customer takes ownership of the product. Sales, including shipping
charges, are recorded net of applicable provisions for discounts and allowances including customer rebates.



We provide adjustments for excess, slow-moving and obsolete raw materials and finished goods based on estimates of future
projections and current conditions. Such adjustments are subsequently modified only when the inventory is physically disposed.



Management reviews its trade accounts receivable balances for collectibility on a regular basis and whenever events and circumstances
indicate that the carrying amount may not be collectible and provides currently for any unrealizable amounts. In making such determinations, management uses its industry experience, customer history
and current economic factors.

We
provide allowances for cash discounts based on average annual expected discounts. We also provide for rebates based on experience by customer and the current period's rebatable sales
projections.



Deferred income taxes are provided on net operating loss carryovers and on the future income tax consequences associated with temporary
differences between the carrying amounts of assets and liabilities for tax and financial reporting purposes. Deferred income tax assets and liabilities are measured using tax rates expected to apply
in the years in which those temporary differences are expected to reverse. The effect of changes in income tax rates is recognized in earnings in the period in which the change occurs. We adopted FASB
Interpretation No. 48 (FIN 48) on January 1, 2007 and did not result in a material change in our liability for unrecognized tax benefits as a result of implementing FIN 48.
We file a consolidated federal income tax return except for our Canadian subsidiary, which files in its local jurisdiction.



Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually and more
frequently when a triggering event occurs. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Our management
makes determinations of the useful lives of our intangible assets, including intellectual property. These determinations are based on the usefulness of the specific intangible asset, as determined by
management using its industry experience and employing our company strategy.

During
2008, our business was adversely impacted by weakness in the U.S. economy and the credit markets generally and the sharp slowdown in residential and commercial construction,
particularly in residential housing. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, or whenever circumstances indicate that impairment may
have occurred. We perform our required impairment tests of goodwill and other indefinite lived intangible assets as of December 31 of each year. We performed our required impairment tests of
goodwill and other indefinite lived intangible assets as of December 31, 2008 and recorded impairment charges of $96.7 million and $24.9 million for goodwill and other indefinite
lived intangible assets, respectively.

Long-lived
assets, including property, plant and equipment and other finite life intangible assets, are reviewed for impairment whenever events or changes in circumstances
indicate that their respective

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carrying
amounts may not be recoverable. Assessment for possible impairment is based on our ability to recover the carrying value of the long-lived asset from the expected future
pre-tax cash flows (undiscounted and without interest charges). If the expected future cash flows are less than the carrying value of such assets, an impairment loss is recognized for the
difference between estimated fair value and carrying value. We recorded a fixed asset impairment charge during the year ended December 31, 2008 of approximately $5.2 million related to
our Norcross, Georgia plant which produces thermally-fused melamine.



We recognize compensation expense resulting from all share-based payment transactions in accordance with Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment" ("FAS 123(R)"). FAS 123(R) establishes fair value as the measurement objective in accounting for share-based payment
arrangements and requires all companies to apply a fair-value based measurement in accounting generally for all share-based payment transactions with employees. This method includes
estimates and judgments pertaining to term, volatility, risk-free interest rates, and dividend yield and forfeiture rates.

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Results of Operations

The following tables set forth summary results of operations data, including the components of net income (loss) as a percentage of net
sales, for the years ended December 31, 2006, 2007 and 2008.

(in thousands)

2006

2007

2008Statement of Operations Data:Net sales

$
460,078

$
424,397

$
366,709Cost of goods sold.


357,494


333,529


305,017Fixed asset impairment charge.








5,165Gross profit


102,584


90,868


56,527Selling, general and administrative expenses


52,783


51,271


48,943Goodwill and other indefinite lived intangible asset impairment charges








121,612Income (loss) from operations.


49,801


39,597


(114,028
)Interest expense


35,577


34,891


29,438Interest income


(628
)

(612
)

(485
)Income (loss) before income tax (benefit) expense


14,852


5,318


(142,981
)Income tax (benefit) expense


3,959


(3,006
)

(21,325
)Net income (loss)

$
10,893

$
8,324

$
(121,656
)




2006

2007

2008Statement of Operations Data:Net sales


100.0
%

100.0
%

100.0
%Cost of goods sold


77.7


78.6


83.2Fixed asset impairment charge








1.4Gross profit


22.3


21.4


15.4Selling, general and administrative expenses


11.5


12.1


13.3Goodwill and other indefinite lived intangible asset impairment charges








33.2Income (loss) from operations


10.8


9.3


(31.1
)Interest expense


7.7


8.2


8.0Interest income


(0.1
)

(0.2
)

(0.1
)Income (loss) before income tax (benefit) expense


3.2


1.3


(39.0
)Income tax (benefit) expense


0.8


(0.7
)

(5.8
)Net income (loss)


2.4
%

2.0
%

(33.2
)%


The Year Ended December 31, 2008 compared to the Year Ended December 31, 2007



Net sales were $366.7 million for the year ended December 31, 2008 compared to $424.4 million for the year ended
December 31, 2007, a decrease of approximately 14%. In local currencies, net sales for the year ended December 31, 2008 also declined approximately 14%. The decrease in sales for the
year ended December 31, 2008 as compared to the year ended December 31, 2007 was primarily attributable to lower high pressure laminate, or HPL, sales which declined approximately 11%
during the year ended December 31, 2008 and thermally-fused melamine, or TFM, sales which declined approximately 20% during the year ended December 31, 2008. The sales declines in both
HPL and TFM for the twelve months ended December 31, 2008 were partially offset by a $7.4 million increase in industrial laminate sales related to our new fiber reinforced plastic, or
FRP, products. Due to the

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appreciation
of the Canadian dollar against the U.S. dollar, currency translation as it relates to our Canadian operation had the effect of increasing sales in the twelve months ended
December 31, 2008 by approximately $2.1 million when compared to foreign exchange translations for the comparable 2007 period.

Sales
of decorative laminates were $317.9 million for the year ended December 31, 2008 compared to $375.6 million for the same period in 2007. Sales of decorative
laminates, which includes both TFM and HPL (approximately 87% of net sales in 2008), decreased approximately 15% in the twelve months ended December 31, 2008 as compared to 2007.

Sales
of other products, net of the intercompany sales eliminations, principally specialty resins, decorative overlay papers and industrial laminates including FRP, were
$48.8 million in both the twelve months ended December 31, 2008 and 2007. Other product sales (approximately 13% of net sales in 2008) remained relatively flat for the year ended
December 31, 2008 as compared to the same period in 2007. For the year ended December 31, 2008, specialty resins accounted for approximately 5.4% of our total sales, while industrial and
other specialty laminates including FRP, and decorative overlay papers accounted for approximately 5% and less than 1% of our sales, respectively.

Our
net sales for the year ended December 31, 2008 were adversely impacted by weakness in the U.S. economy generally and by the sharp slowdown in residential and commercial
construction, particularly the residential housing and credit markets. As the construction and housing industries slow, we experience less demand for our products, which are incorporated into new
buildings and homes, as well as buildings and homes being refurnished or remodeled. Our HPL and TFM products are most affected by these adverse market conditions. We believe that economic conditions
will remain extremely challenging in the near term, and that demand for our products will likely continue to decline as a result, which could negatively impact our net sales, profitability and cash
flows as well as our ability to comply with the covenants set forth in our Credit Facility. In addition to decreases in demand, we have
experienced increased pressure on pricing from our competitors, particularly our more vertically integrated TFM competitors. If this trend continues, our net sales and profitability could continue to
decline.



The gross profit margin as a percentage of net sales declined to approximately 15% in the year ended December 31, 2008 from
approximately 21% in the year ended December 31, 2007. The decline in our gross profit margin for the year ended December 31, 2008 was primarily attributable to lower margins on certain
of our HPL and TFM products and to fluctuating costs related to energy and raw materials, especially those raw materials that are chemicals and those that are petroleum based. Our energy and raw
material costs increased significantly in 2008 as compared to 2007 and we were not able to increase the selling prices of all our products to pass these higher costs through. In addition, we incurred
a fixed asset impairment charge of approximately $5.2 million relating to our Norcross, Georgia plant that also negatively impacted our 2008 gross profit margin. We include certain costs such
as distribution costs in our selling, general and administrative expenses. Accordingly, our gross profit may not be comparable to other companies that include such costs in their cost of goods sold.



Selling, general and administrative expenses, which primarily consist of sales and marketing expenses, were $48.9 million in the
year ended December 31, 2008 compared to $51.3 million for the year ended December 31, 2007. The decrease in selling, general and administrative expenses in the year ended
December 31, 2008 is primarily attributable to aggressive cost containment including headcount reductions, and consolidation of the sales and marketing functions and other synergies realized
through the consolidation of the operations of Panolam and Nevamar, offset in part by additional costs associated with being a public reporting company following the consummation of the exchange offer
for

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our
Notes in October 2007. As a percentage of net sales, selling, general and administrative expenses were approximately 13% in the year ended December 31, 2008 compared to approximately 12% in
the year ended December 31, 2007. The increase in this percentage in the year ended December 31, 2008 was primarily attributable to the lower sales volume in the period.



Interest expense, which includes the amortization of debt acquisition costs, was $29.4 million for the year ended
December 31, 2008 compared to $34.9 million for the same period in 2007. The decrease in interest expense in the year ended December 31, 2008 as compared to the same period in
2007 was primarily attributable to lower average debt levels resulting from the term debt prepayments of $20.0 million made in 2007 and $2.0 million made in 2008 and to a lesser extent
lower average interest rates. In 2007, we also incurred approximately $1.3 million of additional penalty interest on the Notes because we did not file a registration statement with the
Securities and Exchange Commission for an exchange offer involving the Notes within the time required under the registration rights agreement that we entered into with the initial purchasers of the
Notes.



Income tax provision for the year ended December 31, 2008 was a benefit of $21.3 million as compared to a benefit of
$3.0 million for the year ended December 31, 2007. The effective tax rate for the year ended December 31, 2008 was 14.9% compared to (56.5)% for the year ended December 31,
2007. The decrease in the effective tax rate for the twelve months of 2008 as compared to the rate for the twelve months of 2007 was primarily attributable to the overall income tax benefit for the
twelve months of 2008 being reduced by the goodwill impairment charge. The overall income tax benefit for 2008 also included a reduction of the Canadian income tax rate. For more information, please
see Note 13, "Income Taxes" to our consolidated financial statements included in Item 8 to this Annual Report on Form 10-K.



Net loss for the year ended December 31, 2008 was $121.7 million compared to net income of $8.3 million for the
year ended December 31, 2007, a decrease of approximately $130.0 million. The decrease in net income is primarily attributable to the 2008 impairment charges recorded for fixed assets,
goodwill and other indefinite lived intangible assets. In addition, lower net sales in the year ended December 31, 2008 compared to the year ended December 31, 2007 contributed to the
decline in net income, which were partially offset by decreases in the total cost of goods sold due to lower sales volume, as well as decreases in selling, general and administrative expenses,
interest expense and income taxes in the twelve months ended December 31, 2008.

The Year Ended December 31, 2007 compared to the Year Ended December 31, 2006



Net sales were $424.4 million for the year ended December 31, 2007 compared to $460.1 million for the year ended
December 31, 2006, a decrease of approximately 8%. Sales for the year ended December 31, 2007 reflect Nevamar sales for the entire twelve-month period; whereas for the year ended
December 31, 2006, the operating results for Nevamar, which was acquired on March 1, 2006, are included for the post-acquisition period only. Including the Nevamar sales in
2006 through March 1, 2006 with our 2006 sales would result in a number $68.8 million, or approximately 14%, higher than our sales for the year ended December 31, 2007. The
decrease in sales is primarily attributable to lower TFM sales resulting from the slowdown in the residential housing market and the closing of two Nevamar TFM manufacturing facilities in Chino,
California in June 2006 and a TFM manufacturing facility in Tarboro, North Carolina in February 2007. These decreases were partially

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offset
by increased HPL sales. In addition, in 2007 we experienced increased pricing pressure with respect to our TFM products.

Sales
of decorative laminates were $375.6 million for the year ended December 31, 2007 compared to $411.6 million for the year ended December 31, 2006. Sales
of decorative laminates, which include both TFM and HPL (approximately 89% of net sales) decreased approximately 9% compared to the year ended December 31, 2006. However, increasing our 2006
sales by the amount of Nevamar sales for January and February 2006 would indicate that sales of decorative laminates declined by approximately 16% in the year ended December 31, 2007 compared
to the year ended December 31, 2006.

Sales
of other products, net of the intercompany sales eliminations, principally specialty resins, decorative overlay papers and industrial laminates, were $48.8 million for the
year ended December 31, 2007 compared to $48.5 million for the year ended December 31, 2006. Other product sales (approximately 11% of net sales) remained relatively flat in 2007
as compared to 2006. For the year ended December 31, 2007, specialty resins accounted for approximately 5% of our total sales, while industrial and other specialty laminates, and decorative
overlay papers accounted for approximately 3% and 1% of our sales, respectively.

The
adverse sales environment in 2007 was largely the result of the slowdown in residential construction, both for new construction and renovations of existing construction, and to a
lesser extent increasing softness in our commercial business. We expect the current environment to continue, or perhaps become more challenging, at least for the duration of 2009.



The gross profit margin as a percentage of net sales decreased to 21.4% in the year ended December 31, 2007 from 22.3% in the
year ended December 31, 2006. The reduction in our gross profit margin for the year ended December 31, 2007 was primarily attributable to rising costs related to energy and raw materials
and higher depreciation expense which were partially offset by cost reduction initiatives related to the restructuring of Nevamar, many of which were implemented in 2006. These cost savings included
headcount reductions, consolidation of manufacturing operations and other synergies realized through the consolidation of the operations of Panolam and Nevamar.



Selling, general and administrative expenses, which primarily consist of sales and marketing expenses, were $51.3 million for
the year ended December 31, 2007 compared to $52.8 million for the same period in 2006, a decrease of approximately 3%. Including Nevamar's selling, general and administrative expenses
in 2006 through March 1, 2006 with our 2006 selling, general and administrative expenses would result in a number $6.6 million, or approximately 11%, higher than our selling, general and
administrative expenses for the year ended December 31, 2007. The decrease in selling, general and administrative expenses in 2007 is primarily attributable to the cost savings related to the
restructuring of Nevamar which included headcount reduction, consolidation of the sales and marketing functions and other synergies realized through the consolidation of the operations of Panolam and
Nevamar. As a percentage of net sales, selling, general and administrative expenses were 12% for the year ended December 31, 2007 and approximately 11% for the year ended December 31,
2006.



Interest expense, which includes the amortization of debt acquisition costs, was $34.9 million for the year ended
December 31, 2007 compared to $35.6 million for the same period in 2006, a decrease of approximately 2%. The decrease in interest expense in 2007 is primarily attributable to lower
average debt levels resulting from prepayments of our term debt in an aggregate amount of

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$24.5 million
and $20.0 million in 2006 and 2007, respectively, and to a lesser extent lower interest rates.



Income tax benefit for the year ended December 31, 2007 was $3.0 million as compared to a $4.0 million tax
provision for the same period in 2006. The effective tax rate for the year ended December 31, 2007 was (57%) compared to 27% for the year ended December 31, 2006. The significant
decrease in the effective tax rate for the year ended December 31, 2007 as compared to the rate for the year ended December 31, 2006 is primarily attributable to a cumulative tax effect
resulting from the Canadian statutory rate decrease being phased in through 2012.



Net income for the year ended December 31, 2007 was $8.3 million compared to $10.9 million for the year ended
December 31, 2006, a decrease of approximately 24%. The decrease in net income is primarily attributable to lower net sales in the year ended December 31, 2007 compared to the year ended
December 31, 2006, which were partially offset by decreases in the cost of goods sold, selling general and administrative expenses, interest expense and income taxes in the year ended
December 31, 2007.

Liquidity and Capital Resources

We require working capital to reinvest in our business and to repay or continue prepaying our indebtedness. Our total capital
expenditures were approximately $3.4 million in 2008 and assuming we can restructure our indebtedness and continue operations, we anticipate total capital expenditures to approximate
$4.0 million in 2009.

The
principal sources of cash to fund our liquidity needs are cash provided by operating activities and cash provided by borrowings under our Credit Facility. Restrictive covenants in
our debt agreements restrict our ability to pay dividends and make other distributions. Specifically, the Credit Facility restricts us from making payments of dividends or distributions, including to
Panolam Holdings, subject to certain exceptions. Under certain circumstances we are permitted to pay dividends or distributions from our consolidated excess cash flow provided that, after giving
effect to the dividend or distribution, we have a consolidated leverage ratio (calculated as a ratio of consolidated total debt to consolidated adjusted EBITDA (as defined in the Credit Facility) as
of the last day of any fiscal quarter) not exceeding 3.75 to 1.00. Our Credit Facility also requires us to maintain a maximum consolidated leverage ratio (5.00 to 1.00 as of December 31, 2008
and 4.50 to 1.00 as of the end of each quarter ending during fiscal year 2009) that decreases over time and to limit the amount of our capital expenditures in any fiscal year. As of
December 31, 2008, our consolidated leverage ratio was in excess of the permitted maximum amount at 6.47 to 1.00. The Credit Facility further requires us to maintain a minimum interest coverage
ratio (2.00 to 1.00 as of December 31, 2008 and 2.25 to 1.00 as of the end of each quarter during fiscal year 2009) that increases over time. As of December 31, 2008, our minimum
interest coverage ratio was below the required minimum at 1.71 to 1.00. For a discussion of the potential acceleration and restructuring of our indebtedness, see "Deteriorating Market Conditions and
Impact on Financial Condition."

The
indenture governing our Notes also restricts us from making payments of dividends or distributions, subject to certain exceptions, unless, among other things, all such payments are
less than 50% of our consolidated net income for the period from October 1, 2005 to the most recently ended fiscal quarter at the time of the payment. On March 30, 2009, the agent for
the lenders under the Credit Agreement provided us with a "blockage notice" directing us not to make an April 1, 2009 interest payment on the Notes.

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When
cash generated from our operations is sufficient, we may apply portions of our excess cash towards the repayment of our long-term debt. In the years ended
December 31, 2008 and 2007, we prepaid long-term debt of approximately $2.0 million and $20.0 million, respectively.



Cash provided by operating activities was $15.5 million for the year ended December 31, 2008 compared to
$28.1 million for the year ended December 31, 2007. The decrease of $12.6 million in cash flow for 2008 as compared to 2007 related primarily to a decrease in net income of
$130.0 million and a net increase in non-cash expenses of $108.5 million including depreciation and amortization, fixed asset impairment charge, goodwill and other intangible
asset impairment charges, amortization of debt acquisition costs, stock based compensation expense and deferred taxes, all of which was partially offset by a net reduction in the amount of
non-cash components of working capital used in 2008 as compared to 2007 of $8.9 million. The net reduction in non-cash components of working capital resulted primarily
from year-over-year decreases of $1.6 million in accounts receivable, $3.6 million in inventory and $2.0 million in other current assets, reductions of
$6.8 million in income taxes payable, all of which was partially offset by an increase of $5.4 million in accounts payable and accrued liabilities. Cash provided by operating activities
was $28.1 million and $42.3 million for 2007 and 2006, respectively. The decrease in cash flow in 2007 related primarily to a decrease in net income and a higher increase in the
non-cash components of working capital compared to 2006, all of which was partially offset by an increase in non-cash expenses including depreciation and amortization and
deferred taxes.

Cash
used by investing activities was $3.4 million for the year ended December 31, 2008 compared to $8.8 million for the year ended December 31, 2007. The
decrease in cash used by investing activities in 2008 as compared to 2007 is primarily related to a decrease in capital spending of $5.4 million for year ended December 31, 2008 as
compared to the year ended December 31, 2007. Cash used by investing activities was $8.8 million for the year ended December 31, 2007 compared to $90.4 million for the year
ended December 31, 2006. The decrease in cash used by investing activities in 2007 as compared to 2006 is primarily related to cash expended for the Nevamar acquisition of $77.8 million
in 2006 and by decreased capital spending of $3.8 million for year ended December 31, 2007 as compared to the year ended December 31, 2006.

Cash
provided by financing activities was $21.4 million for the year ended December 31, 2008 compared to a cash outflow of $20.4 million for the year ended
December 31, 2007. During the year ended December 31, 2008, the net cash provided by financing activities resulted primarily from $25.9 million draw down under our revolving loan
which was partially offset by $2.0 million in term debt prepayments and the settlement of the subordinated notes with the former owners of Nevamar for $2.5 million, which included
approximately $0.1 million in legal and bank fees. Cash used by financing activities was $20.4 million for the year ended December 31, 2007 compared to a cash inflow of
$52.1 million in the year ended December 31, 2006. During the year ended December 31, 2007, the cash used by financing activities resulted primarily from $20.0 million in
term debt prepayments and $0.4 million in costs associated with the preparation of the registration statement for our Notes. During the year ended December 31, 2006, cash provided by
financing activities resulted primarily from the additional term debt borrowings of $80.0 million, which we used to fund the Nevamar acquisition. For the year ended December 31, 2006,
the cash from the additional term debt borrowings was offset in part by debt acquisition cost of $2.8 million and term debt repayments of $25.1 million.

We
require working capital to reinvest in our business and to repay our indebtedness. If we are able to restructure our indebtedness and continue operations, we anticipate total capital
expenditures of approximately $4.0 million in 2009. Currently, the principal sources of cash to fund our liquidity needs are cash provided by operating activities and cash provided by
borrowings under our Credit Facility. Restrictive covenants in our debt agreements restrict our ability to pay dividends and make other distributions. Specifically, the Credit Facility and the
indenture governing our Notes restrict us

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from
making payments of dividends or distributions, including to Panolam Holdings, subject to certain exceptions. Our Credit Facility also requires us to maintain a maximum consolidated leverage ratio
(4.50 to 1.00 as of the end of each quarter ending during fiscal year 2009) that decreases over time and to limit the amount of our capital expenditures in any fiscal year. As of December 31,
2007 our consolidated leverage ratio was 4.32 to 1.00 and as of December 31, 2008 our consolidated leverage ratio was 6.47 to 1.00, thus exceeding the maximum limit. The Credit Facility further
requires us to maintain a minimum interest coverage ratio (2.00 to 1.00 as of December 31, 2008 and 2.25 to 1.00 as of the end of each quarter during fiscal year 2009) that increases over time.
As of December 31, 2008, our minimum interest coverage ratio was below the required minimum at 1.71 to 1.00.

Our
Credit Facility, which became effective in connection with the 2005 Transactions on September 30, 2005, initially consisted of a $135.0 million senior secured single
draw seven-year term loan, and a $20.0 million senior secured five-year revolving loan. In March 2006, the term loan was increased to $215.0 million and the
revolving loan was increased to $30.0 million. In the past, when cash generated from our operations was sufficient, we applied portions of our excess cash towards the repayment of our
long-term debt. We prepaid $2.0 million, $20.0 million and $24.5 million of the term loan in 2008, 2007 and 2006, respectively. We had no revolver borrowings at
December 31, 2007 and $25.9 million outstanding under the revolving loan at December 31, 2008. Our outstanding revolver borrowings as of December 31, 2008 reflect a
decision to borrow our remaining availability under the revolving loan tranche of our Credit Facility due to the weakening economy and our concerns about the troubled credit markets. At
December 31, 2008, the interest rate on the revolver borrowings was at an annual rate of 4.50%. In addition, we had letters of credit issued in respect of workers' compensation claims in an
aggregate amount of $4.1 million, which also reduces our availability under the revolving loan.

Borrowings
under our Credit Facility bear interest at our option at adjusted LIBOR plus an applicable margin or the alternate base rate plus an applicable margin. The interest rates on
borrowings under our revolving loan are subject to adjustment based on our leverage. At December 31, 2008 and December 31, 2007, the interest rate on the term loan facility was at annual
rates of 3.22% and 7.59%, respectively. Our Credit Facility requires us to meet a maximum total leverage ratio of 5.00, a minimum interest coverage ratio of 2.00 and an annual maximum capital
expenditures limitation of $8.0 million, all as of December 31, 2008. The Credit Facility also contains certain customary events of default, which in some instances are subject to grace
periods.

As
of December 31, 2008, we were not in compliance with all of our financial covenants under our Credit Facility, which constitutes a default. As a result, the lenders have the
ability to accelerate our payment obligations and, in the event there was availability under the revolver, we would not be permitted to borrow funds until our noncompliance is cured or waived by the
lenders. On March 31, 2009, we entered into a forbearance agreement with our lenders pursuant to which they have agreed to forbear exercising any rights and remedies under the Credit Facility
relating to these defaults until the earlier of (i) June 30, 2009, (ii) the occurrence of an event of default under the Forbearance Agreement or (iii) the fulfillment of
all obligations under the Forbearance Agreement and the Credit Facility and the termination of the Credit Facility.

The
indenture governing our Notes also contains a number of covenants that restrict our ability to incur or guarantee additional indebtedness or issue disqualified or preferred stock,
pay dividends or make other equity distributions, repurchase or redeem capital stock, make investments or other restricted payments, sell assets, engage in transactions with affiliates, create liens
or consolidate or merge with or into other companies, and the ability of our restricted subsidiaries to make dividends or distributions to us. On March 30, 2009, the agent for the lenders under
the Credit Agreement provided us with a "blockage notice" directing us not to make an April 1, 2009 interest payment on the Notes.

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The following table summarizes our financial commitments as of December 31, 2008 and assuming our long-term debt is
not accelerated:

Payments by PeriodTotal

2009

2010

2011

2012

2013

Thereafter(in thousands)Term loan

$
167,586

$


$


$


$
167,586




$
Senior subordinated notes


151,000














151,000


Revolving loan


25,928





25,928











Capital lease obligations


26


13


13











Operating lease obligations


18,847


3,260


3,221


3,217


2,868


2,035


4,246Purchase obligations(1)


13,044


13,044














Income tax obligation


3,954


3,954














Benefit plan obligations(2)


3,246


191


239


255


275


314


1,972Annual management fee(3)


9,000


1,500


1,500


1,500


1,500


1,500


1,500Fixed interest chargesrevolving loan(4)


2,156


1,232


924











Fixed interest chargesterm loan(4)


17,595


5,396


5,396


5,396


4,047





Fixed interest chargessenior subordinated notes(4)


77,102


16,232


16,232


16,232


16,232


12,174


Total contractual obligations

$
492,124

$
44,822

$
53,453

$
26,600

$
192,508

$
167,023

$
7,718


---

The
capital leases referred to above are for forklifts in our Elkhart, Indiana distribution center. The operating leases referred to in the above table include our manufacturing
facilities in Huntsville, Ontario; Oshkosh, Wisconsin; Albany, Oregon; Norcross, Georgia; Auburn, Maine; Hampton, South Carolina; and Morristown, Tennessee; our corporate headquarters in Shelton,
Connecticut, our distribution centers in Elkhart, Indiana; Conyers, Georgia; Rancho Cucamonga, California; Dallas, Texas; Shelton, Connecticut; and Montevideo, Minnesota, and to the extent applicable,
our closed manufacturing and distribution facilities. Leases include buildings, machinery, office equipment and vehicles.

In
April 2005, we contracted to build an addition to our Morristown, Tennessee facility for an expansion of our industrial and engineered laminates line. Construction began in the third
quarter of 2005 and the project was completed in the fourth quarter of 2007. Total capital expenditures for this

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project
were approximately $5.6 million in combined 2005, $8.6 million in 2006, $4.9 million in 2007 and $0.5 million in 2008.

Off Balance Sheet Obligations

We have no off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Regulatory Compliance

We are subject to federal, state, local and foreign (Canadian) laws, regulations and ordinances pertaining, among other things, to the
quality and the protection of the environment and human health and safety and that require us to devote substantial time and resources in an effort to maintain continued compliance. There can be no
assurance that judicial or administrative proceedings seeking penalties or injunctive relief will not be brought against us for alleged non-compliance with applicable environmental laws
and regulations relating to matters as to which we are currently unaware. In addition, changes to such regulations or the enactment of new regulations in the future could require us to undertake
capital improvement projects or to cease or curtail certain operations or could otherwise substantially increase the capital requirements, operating expenses and other costs associated with
compliance. We believe we have adequately provided for costs related to our ongoing obligations with respect to known environmental liabilities. Expenditures related to environmental liabilities
during the year ended December 31, 2008 did not have a material effect on our financial condition or cash flows. Such expenditures are related to the costs to maintain general compliance at our
facilities. The majority of the costs include staffing and training expenses, permitting and emission based fees, testing and analytical fees and waste disposal fees.

Our
Auburn, Maine facility is subject to a Compliance Order by Consent, or COC, dated May 5, 1993, issued by the State of Maine Department of Environmental Protection, or DEP,
with regard to unauthorized discharges of hazardous substances into the environment. We, along with the previous owners, named in the COC, are required to investigate and, as necessary, remediate the
environmental contamination at the site. Because the unauthorized discharges occurred during the previous ownership, the previous owners have agreed to be responsible for compliance with the COC. The
previous owners have completed and submitted a risk assessment to the State for its review. The financial obligation of the previous owners to investigate and/or remediate is unlimited except with
regard to a portion of the land at our Auburn, Maine facility, which is capped at $10.0 million. We have recorded a liability of $0.7 million at December 31, 2008 and 2007, for
site remediation costs in excess of costs assumed by the previous owners. We could incur additional obligations in excess of the amount accrued and our recorded estimate may change over time. We
expect this environmental issue to be resolved within the next five to ten years.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to our operations result primarily from changes in general economic conditions and interest rate fluctuations. In
the normal course of business, we also have foreign currency risks associated with our Canadian operations. There is also risk related to commodity price changes for items such as particleboard,
medium density fiber-board, or MDF, and raw paper. In addition, we have exposure to changes in energy related costs for natural gas, heating oil
and electricity. Many of the resins and chemicals used to produce our resins are petroleum based and therefore subject to the same market fluctuations as energy costs. We are also subject to
surcharges by trucking companies due to the increased fuel costs. We employ established purchasing policies and procedures to manage our exposure to these risks. We do not utilize derivative financial
instruments for trading, speculative or other purposes.

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Our interest rate risk management objective is to limit the impact of interest rate changes on net income and cash flow and to lower
overall borrowing cost.

Amounts
outstanding under our Credit Facility bear interest at LIBOR plus an applicable margin or at an alternate base rate plus an applicable margin. These interest rates can fluctuate
based on market rates. Based on the outstanding amount of our variable rate indebtedness at December 31, 2008, a 10% change in the interest rates at December 31, 2008 would have the
effect of increasing or decreasing interest expense by approximately $0.6 million. Potential interest rate impact would also be affected by utilization of the revolving loan.

The
net amounts paid or received and net amounts accrued through the end of the accounting period are included in interest expense. Interest expense also includes the amortization of
debt acquisition costs.



We have a Canadian subsidiary, Panolam Industries, Ltd., that has a manufacturing facility in Canada that sells to both Canadian
and U.S. customers and purchases from both Canadian and U.S. suppliers. Our Canadian subsidiary operates within its local economic environment and utilizes its own operating cash flow to fund its
operations. The Canadian subsidiary's sales tend to be evenly split between U.S. and Canadian customers but shift depending on market demand; however, a greater percentage of raw materials purchases
are in local currency. As a result, when the Canadian dollar strengthens, expenses increase as a percent of sales when reported in U.S.
dollars. Conversely, when the Canadian dollar weakens it has the opposite effect. At the same time the Canadian foreign exchange rate fluctuations require revaluation of the Canadian subsidiary's
balance sheet resulting in foreign currency translation exchange gains or losses being charged or credited to other comprehensive income or (loss) on the balance sheet. We have not entered into any
derivative financial instruments to reduce our exposure to foreign currency exchange rate risk.

During
the year ended December 31, 2008, we recorded $0.9 million in income related to net foreign exchange transaction and revaluation adjustments, compared to foreign
exchange expense of approximately $1.3 million during the year ended December 31, 2007. At December 31, 2008, we had approximately $5.1million of unfavorable foreign currency
translation adjustments and at December 31, 2007 we had approximately $17.6 million of favorable foreign currency translation adjustments included in stockholder's equity. There can be
no assurances that the Canadian foreign exchange rate will not fluctuate adversely in the future and the potential risk for translation losses is not quantifiable.



We purchase commodities for our products such as paper, resins (and the chemicals used in making resins), wood furnish (used in the
production of particleboard), raw particleboard and medium density fiberboard (MDF). We also purchase other commodities, such as natural gas, heating oil and electricity. These commodities are
generally purchased pursuant to contracts or at market prices established with the vendor, and we are subject to risks on the pricing of these commodities. We do not engage in hedging activities for
these commodities.



We sell HPLs and TFMs to various distributors and OEMs; and we extend credit to our customers based on an evaluation of their
financial condition. We review our trade accounts receivable balances for collectibility whenever events and circumstances indicate that the carrying amount may not be collectible and provide
currently for any unrealizable amounts.

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We
had uncollateralized accounts receivable from five nonaffiliated customers approximating 14% and 11% of total gross accounts receivable balances at December 31, 2008 and 2007,
respectively. Sales to these five nonaffiliated customers were 8%, 7% and 9% of consolidated net sales for the years ended December 31, 2008, 2007 and 2006, respectively. No single customer
represented over 10% of sales or accounts receivable.

Item 8.    Financial Statements and Supplementary Data

Our consolidated balance sheets as of December 31, 2008 and 2007, and the related consolidated statements of operations,
stockholder's equity and cash flows for the years ended December 31, 2008, 2007 and 2006, and the notes thereto, the report of our independent registered public accounting firm thereon, and the
financial statement schedule begin on page F-1 of this report and are incorporated herein by reference.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A(T).    Controls and Procedures

(a)   Disclosure
controls and procedures.

Our
management, with the participation of our Chief Executive Officer and Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2008. Based on this evaluation, our Chief
Executive Officer and Vice President and
Chief Financial Officer concluded that, as of December 31, 2008, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934.

(b)Management's Annual Report on Internal Control Over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control systems were designed to provide reasonable
assurance to our management and our Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and include those policies and procedures that:



Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, it used the control criteria framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") published in its report entitled "Internal Control-Integrated Framework." Based on our assessment, management
has

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determined
that as of December 31, 2008, our internal control over financial reporting is effective based on those criteria. The Company believes that a system of controls, no matter how well
designed and operated, cannot provide assurance that the objectives of the controls are met, and no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company can be detected.

This
annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by the Company's registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management's
report in this annual report.

(c)   Changes
in internal controls over financial reporting.

The
Company continually seeks ways to improve the effectiveness and efficiency of its internal controls over financial reporting, resulting in frequent process refinement. However, there
have been no changes in our internal control over financial reporting that occurred during our last fiscal period to which this Annual Report on Form 10-K relates that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

On March 31, 2009, we entered into a forbearance agreement with the lenders under our Credit Facility pursuant to which they
have agreed to forbear exercising any rights and remedies under the Credit Facility relating to our failure to comply with certain financial and reporting covenants, including their right to
accelerate our payment obligations under the Credit Facility, until the earlier of (i) June 30, 2009, (ii) the occurrence of an event of default under the Forbearance Agreement or
(iii) the fulfillment of all obligations under the Forbearance Agreement and the Credit Facility and the termination of the Credit Facility.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

MANAGEMENT

Under the terms of a stockholders agreement entered into among Panolam Holdings, the Sponsors, Robert J. Muller and certain
other members of our management team who invested in Panolam Holdings, each of the Sponsors has the right to elect three of our directors and is obligated to elect our Chief Executive Officer as an
additional director. The following table sets forth the name, age and position of our directors and executive officers as of December 31, 2008.

Name

Age

PositionRobert J. Muller


62

Chairman, President and Chief Executive OfficerVincent S. Miceli


51

Vice President and Chief Financial OfficerJeffrey M. Muller


35

Vice President, Human Resources, General Counsel, and SecretaryJean-Pierre L. Conte


45

DirectorDarren J. Gold


38

DirectorJ. Ryan Clark


34

DirectorWilliam C. Oehmig


59

DirectorHunter Nelson


56

DirectorKent Wallace


38

DirectorRichard H. Gesseck


63

Director


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Robert J.
Muller has been our President and Chief Executive Officer since 1998 and our Chairman since 2000. Before joining us, Mr. Muller was Executive Vice President of
Crane Co. for 13 years with responsibility for various industrial and supply businesses. Mr. Muller received a B.Ch.E from Manhattan College, an M.S. from the University of
Massachusetts and an M.B.A. from the University of Delaware.

Vincent S.
Miceli is our Vice President and Chief Financial Officer and joined us in May 2006. Before that, Mr. Miceli served as Vice President of Finance for OptiCare
Health Systems, Inc., an integrated
eye care service company, from May 2005 after first joining the company as Director of External Reporting in 2004. From 1994 to 2004, Mr. Miceli was Assistant Corporate Controller of Amphenol
Corporation, a manufacturer of interconnect products. Mr. Miceli holds an M.B.A. with a concentration in finance from the University of Hartford and a B.S. in Accounting from Quinnipiac
College. Mr. Miceli is also an affiliate member of both the American Institute of Certified Public Accountants and the Connecticut Society of Certified Public Accountants.

Jeffrey M.
Muller is our Vice President, Human Resources, General Counsel, and Secretary and has been with us since 2000. Before joining us, Mr. Muller was a patent
attorney with Ohlandt, Greeley, Ruggiero and Perle, LLP in Stamford, Connecticut. Prior to that, Mr. Muller was a mechanical engineer with Emcore Corporation, a provider of compound
semiconductor-based components and subsystems, and was responsible for the design of Metal Organic Compound Vapor Deposition equipment. Mr. Muller received a B.S. in mechanical engineering from
Manhattan College, a J.D. from Albany Law School of Union University and is admitted to practice in New York, Connecticut and the U.S. Patent and Trademark Office. Mr. Muller is the son of
Robert J. Muller, our Chairman, President and Chief Executive Officer.

Jean-Pierre L.
Conte became one of our directors following consummation of the 2005 Transactions. Mr. Conte is currently Chairman and Managing Director of
Genstar Capital. Mr. Conte joined Genstar Capital in 1995. Prior to leading Genstar Capital, Mr. Conte was a principal at the NTC Group, Inc., a private equity firm. He began his
career at Chase Manhattan Bank in 1985. He is a director of PRA International, Inc., Harlan Laboratories, Inc., TravelCLICK, Inc. and Confie Seguros. Mr. Conte holds a B.A.
from Colgate University and an M.B.A. from Harvard University.

Darren J.
Gold became one of our directors following consummation of the 2005 Transactions. Mr. Gold joined Genstar Capital in 2000 and is currently a Managing Director.
Before joining Genstar Capital, Mr. Gold was an engagement manager with McKinsey & Company, a management consulting firm. He serves as a director of ConvergeOne, Voice Construction,
Woods Equipment Company and International Aluminum. Mr. Gold holds a B.A. in Political Science and History from the University of California, Los Angeles and a J.D. from the University of
Michigan.

J. Ryan
Clark became one of our directors following consummation of the 2005 Transactions. Mr. Clark is a Principal at Genstar Capital. Prior to joining Genstar Capital,
Mr. Clark was an associate at Hellman & Friedman LLC, a private equity investment firm in San Francisco. Previously, he worked in the Mergers, Acquisitions and Restructuring
Department at Morgan Stanley in New York. Mr. Clark currently serves as a director and Chairman of the Board for Confie Seguros, and a director of Fort Dearborn Company,
21st Services, LLC, MidCap Financial, LLC, Woods Equipment Company and PRA International, Inc. Mr. Clark holds an M.B.A. from Harvard University and an
A.B. in Environmental Science and Public Policy from Harvard College.

William C.
Oehmig became one of our directors following consummation of the 2005 Transactions. Mr. Oehmig has been a principal with The Sterling Group since 1984, having
worked previously in banking, mergers and acquisitions, and as Chief Executive Officer and Vice President and Chief Financial Officer of several private companies. Before joining The Sterling Group,
Mr. Oehmig represented foreign investors in purchasing and managing U.S. companies in the oil field service, manufacturing, distribution, heavy equipment and real estate industries. He began
his career in

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Houston
with Texas Commerce Bank in 1974. He currently serves on the boards of Propex, North American Energy Partners and Universal Fiber Systems. In addition, Mr. Oehmig served as chairman of
Royster-Clark, Purina Mills and Exopack, and served as a director of Sterling Diagnostic Imaging. Mr. Oehmig received his B.S. in economics from Transylvania University and an M.B.A.
from the Owen Graduate School of Management at Vanderbilt University. Mr. Oehmig resigned from our Board effective January 28, 2009 and to date a replacement for Mr. Oehmig has
not been selected.

Hunter
Nelson became one of our directors following consummation of the 2005 Transactions. He has been a principal with The Sterling Group since 1989, following the sale of Fiber
Industries, Inc., a manufacturer of PET fiber and bottle resin, where he served as Vice President of Administration and General Counsel from its formation in 1988. Before joining Fiber
Industries, Mr. Nelson was a partner in the law firm of Andrews & Kurth L.L.P., which he joined in 1979. At Andrews & Kurth, Mr. Nelson specialized in mergers and
acquisitions, securities and corporate finance and general corporate law. Mr. Nelson currently serves as a director of Propex and Roofing Supply Group and served on the boards of Sterling
Diagnostic Imaging and Sterling Chemicals. Mr. Nelson received a B.B.A. in accounting and a J.D. with honors from the University of Texas at Austin.

Kent
Wallace became one of our directors following consummation of the 2005 Transactions. Mr. Wallace joined The Sterling Group in 2001 and is currently a Managing Director of The
Sterling Group. Previously he was an Associate with Rocky Mountain Capital Partners and an Assistant Vice President at Long-Term Credit Bank. Mr. Wallace began his career at
Coopers & Lybrand. Mr. Wallace previously served as a director of Hudson Products Holdings Inc. and currently serves as a director of Universal Fibers. He received a B.B.A. and an
M.P.A. in accounting from the University of Texas and his M.B.A. with honors from the Graduate School of Business at the University of Chicago.

Richard H.
Gesseck, CPA joined our board of directors on January 18, 2006. Mr. Gesseck began his career with Ernst & Young LLP in September 1969
and served publicly and privately held manufacturing and distribution entities as an audit partner for over 20 years. Mr. Gesseck retired from Ernst & Young LLP in January
2004. Currently, Mr. Gesseck serves on the Connecticut State Board of Accountancy and chairs our Audit Committee. He also teaches Securities and Exchange Commission reporting and other
accounting and auditing courses for the American Institute of CPAs. Mr. Gesseck holds a B.S. in Business Administration from the University of New Haven. Mr. Gesseck is a partner with
UHY LLP and a managing director and principal of UHY Advisors, Inc. He is also a board member of Nutmeg Financial, MHC and Briarwood College.



Our board of directors has established an audit committee, compensation committee and nominating and governance committee. The members
of our audit committee are J. Ryan Clark, Kent Wallace and Richard H. Gesseck. The members of our compensation, and nominating and governance committees are Robert J. Muller, Darren J.
Gold and Hunter Nelson. Our board of directors has determined that Richard H. Gesseck is an audit committee financial expert. There are no listing standards applicable to the Company by which
our board of directors may determine whether Mr. Gesseck is "independent."



We have not yet adopted a code of ethics applicable to our principal executive officer, principal financial officer, principal
accounting officer and persons performing similar functions. We have not yet adopted a code of ethics because we are under no legal obligation to adopt a code of ethics and we are not a member of any
self-regulatory organization that requires us to adopt a code of ethics. If and when we adopt a code of ethics, we will file a copy of the code of ethics with the Securities and

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Exchange
Commission and will provide a copy, without charge, to any person that submits a written request to us at our principal offices.

Item 11.    Executive Compensation

Compensation Discussion & Analysis



The compensation committee (the "Committee") of the board of directors is primarily responsible for setting the compensation for the
Company's named executive officers. The objectives of the Company's executive compensation program are to attract, motivate and retain key executives and to reward executives for value creation. The
Committee seeks to foster a performance-oriented environment by tying a portion of each executive's cash compensation to the achievement of performance goals based primarily on the Company's adjusted
EBITDA as defined in the Credit Facility, but without using incentives that encourage risky short-term behavior.

The
Company's executive compensation program has three elements: base salary, a cash bonus plan called the Bonus Plan, which was adopted in February 2007 by the Committee, and stock
options granted under the Company's 2005 Equity Incentive Plan. While the Committee believes that the named executive officers' compensation should contain an appropriate mix of salary, cash incentive
compensation and equity compensation, the Committee has not established a formula for allocating executive compensation among the various elements.

Robert J.
Muller, the Company's Chief Executive Officer, has an employment agreement with the Company, which is described under "Employment Agreements" below. The employment
agreement establishes Mr. Muller's base salary and bonus opportunity. Vincent S. Miceli, Vice President and Chief Financial Officer, and Jeffrey M. Muller, Vice President, Human
Resources and General Counsel, also are party to employment agreements with the Company. The employment agreements for Messrs. Miceli and Muller are terminable by the Company or the executive
at any time and do not establish the terms of their compensation. See "Employment Agreements." For these named executive officers, the Committee establishes a total cash compensation target based on
the committee's knowledge of the industry and its experience with companies similarly situated to the Company. The Committee also considers management compensation of the Company's competitors, which
include Formica and Wilsonart. Based on this information, the Committee was able to establish a benchmark for assessing the competitiveness of the Company's compensation and the appropriate allocation
of compensation between cash and equity.

The
Committee also considers the contributions of each named executive officer to the Company's performance and the responsibilities of each named executive officer in connection with
the Company's business plan. The Chief Executive Officer is a member of the Committee and provides input with
respect to the contribution of each named executive officer (other than the Chief Executive Officer) to the Company's performance, particularly in connection with establishing performance targets and
potential bonus payouts under the Bonus Plan. The Committee reviewed the Chief Executive Officer's recommendations in connection with making its final determination of each named executive officer's
salary and bonus opportunity (other than with respect to the Chief Executive Officer). Targets under the Bonus Plan are set at the discretion of the Chief Executive Officer and the Chief Executive
Officer is entitled to adjust the bonus payout of participants (other than the Chief Executive Officer) in the Bonus Plan to reflect that participant's contribution to the Company's performance.

Except
as described above, the Committee retains final decision-making power with respect to all elements of executive compensation for all named executive officers other than the Chief
Executive Officer. The Committee makes recommendations regarding compensation for the Chief Executive Officer to the full Board of Directors (other than the Chief Executive Officer), which then acts
on the

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Committee's
recommendations. The Chief Executive Officer does not retain the ability to call meetings of the Committee, but the Chief Executive Officer is a member of the Committee and participates
regularly in its scheduled meetings.

As
a matter of best practice, beginning in 2009, the Committee will review the relationship between our risk management policies and practices and the incentive compensation we provide
the named executive officers to confirm that our executive compensation does not encourage unnecessary and excessive risks.



The Committee sets or recommends base salaries for each named executive officer at levels intended so that the Company remains
competitive in the market for executive talent in which it competes and to provide each named executive officer with a predictable income that appropriately compensates the named executive officer for
his contributions to the Company's performance.

Each
named executive officer's base salary is established based on the Committee's industry knowledge and peer group data as described above and is adjusted based on the named executive
officer's individual performance and experience. The Committee believes that executive officers with a greater level of responsibility within the Company should receive a greater percentage of their
compensation based on the Company's performance. Base salaries for the named executive officers (other than the Chief Executive Officer) in 2008 were increased by approximately 11%.

Given
the limited use of equity compensation in the Company's compensation program, the Company has not to date adjusted base salaries or bonus opportunities based on any amounts
realized through prior equity compensation awards.



Each named executive officer is eligible to receive a cash bonus equal to a percentage of his salary. The cash bonus opportunity is
based upon the Company's achievement of adjusted EBITDA targets set prior to the beginning of the year. EBITDA is the Company's earnings before taking into account interest, taxes, depreciation and
amortization. The Company's EBITDA may be adjusted in the sole discretion of the Committee to exclude extraordinary events and acquisitions or dispositions that occur during the year. Adjusted EBITDA
is determined by adding the management fee paid to the Sponsors, non-cash compensation expense related to stock options granted to employees and certain other items to the Company's
EBITDA. Adjusted EBITDA under the Bonus Plan is the same measurement used to determine compliance with financial covenants under the Company's Credit Facility.

Cash
incentive bonus payments are calculated by the Company's achieving budgeted adjusted EBITDA goals for the year, though bonus payouts can be adjusted by the Chairman and Chief
Executive Officer to reflect individual performance. The Committee believes that this approach is the most useful measure of management's effectiveness in creating value for the shareholders of the
Company. The Company measures adjusted EBITDA annually and pays annual bonus payments under the Bonus Plan if the Company has achieved the objectives set by the Committee.

For
2008, the Committee initially set the target for adjusted EBITDA at $72.6 million. The Committee believes that at the time the target was selected there was a moderate chance
that the target would be achieved. If the target was achieved, Robert J. Muller was entitled to a bonus equal to 75% of his base salary while each other named executive officer was entitled to
a bonus payout of 40% of his base salary. Bonus payouts were increased or decreased based on the amount by which the Company exceeded or fell short of the adjusted EBITDA target. Cash incentive
payouts for the Chief Executive Officer under the Bonus Plan ranged from 58% to 137% of his base salary depending on the adjusted EBITDA level achieved. Cash incentive payouts for the other named
executive officers under

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the
Bonus Plan ranged from 25% to 70% of the named executive officer's base salary depending on the adjusted EBITDA level achieved. No bonuses could be earned by any executive officer if the Company's
adjusted EBITDA was less than $62.0 million. In fiscal 2008, officers earned no Bonus Plan payments, as adjusted EBITDA was significantly below the 2008 target.



The Company's executive officers are eligible to receive equity based awards under the Panolam Holdings Co. 2005 Equity
Incentive Plan. To date, the Committee has only granted options to purchase shares of Panolam Holdings common stock under the Plan. Options are awarded at the discretion of the Committee and generally
vest in equal annual installments over a five-year period. In determining the size of the option award granted to each named executive officer, the Committee considers equity awards
received by similar officers at comparable companies and the Chief Executive Officer's views regarding the past and/or future contribution of the named executive officer to the Company's performance.
The exercise price of all stock options is the per share fair market value of Panolam Holdings common stock on the date of grant. To determine the per share fair market value, the Company engaged an
outside consultant to provide a valuation of the Company. In making its determination, the consultant considered the fair value based methodology of accounting for employee stock options as described
in FAS 123(R).

Newly
hired executive officers typically receive grants following their hire dates, if approved by the Committee. In addition, the Committee may, in its discretion, issue additional
equity incentive awards to executive officers if the Committee determines that the awards promote retention. To date, the Committee has only awarded options to named executive officers upon the
closing of the 2005 Transactions (for named executive officers then employed by the Company) and to Vincent S. Miceli on May 9, 2006, his initial hiring date, and on March 5, 2007.

The
Committee believes that the use of options that vest over an extended period of time promotes the retention of named executive officers as well as the Company's interest in producing
shareholder value over the long term. 2005 and 2006 were transitional years for the Company. Following the 2005 Transactions and the 2006 acquisition of Nevamar the Company experienced turnover among
its employees, particularly in the executive ranks. As a result, the Committee determined that the opportunity for equity ownership in the form of options to acquire common stock would provide the
Company with the needed stability among its executive officers and make it more attractive for recruiting executive talent.

Given
the size of the equity awards granted to each named executive officer upon consummation of the 2005 Transactions or the date of hire, as applicable, and the size of each named
executive officer's cash compensation, the Committee determined not to grant option awards to the named executive officers in 2006, 2007 or 2008 (other than the grants to Mr. Miceli in 2006 and
2007).



The Company does not provide its executive officers with significant perquisites. The amounts shown in the Summary Compensation Table
under the heading "Other Compensation" represent the value of Company matching contributions to the named executive officers' 401(k) accounts and the taxable value of certain life insurance benefits.
Named executive officers did not receive any other perquisites or other personal benefits.



The Chief Executive Officer's base salary and bonus opportunity are set forth in his employment agreement. See "Employment Agreements"
below. The Sponsors believe that it was exceedingly

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important
to retain the Chief Executive Officer in connection with their acquisition of the Company and negotiated the employment agreement as part of their acquisition of the Company.

Total
compensation paid to the Company's Chief Executive Officer in 2008 was significantly higher than that of the other named executive officers. The Committee and the Board of
Directors believe that the Chief Executive Officer's pay is appropriate given his job experience, responsibilities and length of service with the Company. The Committee uses the same factors in
recommending the compensation of the Chief Executive Officer as it does for the other participants in the Bonus Plan though the targets for the Chief Executive Officer were initially set forth in his
employment agreement. Those targets were adjusted by the Committee and the Board of Directors in 2006 due to the Company's acquisition of Nevamar. The Chief Executive Officer's base salary for 2008
was $650,000. The Chief Executive Officer did not receive a cash incentive payment for fiscal 2008 under the Bonus Plan.

Recoupment Policy

The Company has not established a policy for the recoupment of performance based compensation in the event of a restatement of its
financial statements.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with the management of Panolam
Industries International, Inc. Based on the Compensation Committee's review and discussion of the Compensation Discussion and Analysis with management, the Compensation Committee recommended to
the Board of Directors of Panolam Industries International, Inc. that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

SUBMITTED
BY THE COMPENSATION
COMMITTEE OF THE BOARD OF
DIRECTORS

Darren J.
Gold, Chair
Hunter Nelson
Robert J. Muller

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Summary Compensation Table

Name and Position

Year

Salary ($)

Option
Awards(1)

Non-Equity
Incentive Plan
Compensation(2)

All Other
Compensation ($)(3)

Total ($)Robert J. Muller


2008

$
650,000

$
269,319




$
7,750

$
927,069Chairman, President and


2007

$
650,000

$
269,319

$
377,845

$
6,396

$
1,303,560Chief Executive Officer


2006

$
633,333

$
269,319

$
965,000

$
7,500

$
1,875,152Vincent S. Miceli(4)


2008

$
198,333

$
74,882




$
4,100

$
277,315Vice President and


2007

$
185,000

$
69,345

$
47,500

$
2,625

$
304,470Chief Financial Officer


2006

$
112,500

$
26,897

$
95,500




$
234,897Stephen C. Feuring(5)


2008

$
189,583

$
53,870




$
163,559

$
407,012Vice President, Sales


2007

$
185,000

$
53,870

$
47,500

$
6,150

$
292,520and Marketing


2006

$
168,333

$
53,870

$
142,523

$
4,500

$
369,226Jeffrey M. Muller


2008

$
189,583

$
53,870




$
7,000

$
250,453Vice President, Human


2007

$
170,000

$
53,870

$
43,750

$
6,750

$
274,370Resources and General
Counsel


2006

$
153,333

$
53,870

$
130,646

$
6,067

$
343,916


---

Grants of Plan-Based Awards

There were no options granted to our named executive officers during the year ended December 31, 2008.

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Employment Agreements



Panolam Industries International, Inc. and Panolam Holdings entered into a Second Amended and Restated Employment Agreement with
Robert J. Muller to serve as our Chief Executive Officer effective upon the closing of the 2005 Acquisition. The agreement has an initial term ending on December 31, 2010 and, after such date,
Mr. Muller will continue to serve for additional one-year terms, unless either party terminates the agreement in accordance with its provisions.

Mr. Muller's
base salary was set at $550,000 per year and may be increased upon the Company's achievement of certain levels of earnings before interest, taxes, depreciation and
amortization, or EBITDA, in any year. On April 1, 2006, Mr. Muller's base salary was set at $650,000. Once increased, Mr. Muller's base salary may not be decreased.
Mr. Muller is also entitled to an annual bonus the amount of which is determined by the adjusted EBITDA of the Company in any calendar year and the amount by which adjusted EBITDA trails
adjusted EBITDA targets for that year as established by the Board of Directors of Panolam Holdings. Under the employment agreement, Mr. Muller is also entitled to participate in all employee
benefit programs, fringe benefits and perquisites available to senior executives of the Company and Panolam Holdings.

In
accordance with Mr. Muller's employment agreement, Mr. Muller acquired, in connection with the 2005 Acquisition, shares of common stock of Panolam Holdings having an
initial agreed upon value of $2,000,000 pursuant to a tax-free exchange of the shares of common stock of the prior holding company of Panolam Industries International, Inc. owned by
him for that of Panolam Holdings in accordance with a stock purchase agreement. As of the closing of the 2005 Acquisition, Mr. Muller also received options to purchase 8,889 shares of Panolam
Holdings' common stock. The options were granted pursuant to the 2005 Equity Incentive Plan and vest in five equal annual installments on each anniversary of the grant date. In addition, the options
vest in full upon the occurrence of any approved sale that occurs during the term of Mr. Muller's employment and any approved sale that takes place within one year following Mr. Muller's
involuntary termination by the Company without cause.



Panolam Industries International, Inc. has entered into an employment agreement with each of Vincent S. Miceli and Jeffrey M.
Muller. These employment agreements are terminable by either party at any time. These employment agreements provide that each of the named executive officers will be entitled to certain payments and
benefits in the event that their employment is terminated without cause. See "Potential Payments Upon Termination or Change of Control."



The Company terminated the employment of Stephen C. Feuring on December 11, 2008. Under the terms of Mr. Feuring's
employment agreement with the Company, his employment was terminable by either party at any time. The employment agreement provided that Mr. Feuring would be entitled to receive certain
payments and benefits in the event that the Company terminated his employment without cause. Those payments and benefits are substantially the same as those to which Mr. Miceli or
Mr. Jeffrey Muller would be entitled. See "Potential Payments Upon Termination or Change of Control," for a description. In connection with Mr. Feuring's termination, he has received and
will receive those payments and benefits described in Note (5) to the Summary Compensation Table.

Employee Benefit Plans

In connection with the 2005 Acquisition, Panolam Holdings adopted its 2005 Equity Incentive Plan that permits the grant of restricted
stock, stock units, stock appreciation rights, cash and stock options,

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including
non-qualified stock options and incentive stock options, to purchase shares of common stock of Panolam Holdings. The 2005 Equity Incentive Plan is administered by the
compensation committee of Panolam Holdings. 17,778 shares of the common stock of Panolam Holdings may be issued under the 2005 Equity Incentive Plan. Upon a change of control (as defined in the
agreement), the compensation committee may provide at any time prior to such change of control that all then unvested stock options will immediately vest and become exercisable and all stock
appreciation rights, stock units and unvested cash awards will immediately vest and any restrictions upon restricted stock awards or stock units will immediately lapse. The committee may also provide
that the awards will remain exercisable for the remainder of their terms, notwithstanding any subsequent termination of a participant's service. All options granted to date vest ratably over a
five-year period beginning on the first anniversary of the date of grant.

Outstanding Equity Awards

The following table shows information regarding outstanding options to acquire stock of Panolam Holdings held by our named executive
officers as of December 31, 2008:

Name

Date of Grant

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable(1)

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable(1)

Option
Exercise
Price

Option
Expiration
DateRobert J. Muller

September 30, 2005


5,333


3,556

$
500.00

September 30, 2015Vincent S. Miceli

May 9, 2006


200


300

$
500.00

May 9, 2016March 5, 2007


100


400

$
750.00

May 9, 2017Stephen C. Feuring(2)

September 30, 2005


1,067


711

$
500.00

September 30, 2015Jeffrey M. Muller

September 30, 2005


1,067


711

$
500.00

September 30, 2015


---

Potential Payments Upon Termination or Change of Control



Following is a summary of the arrangements that provide for payment to Robert J. Muller at, following or in connection with any
termination, including resignation, severance, retirement or constructive termination or in connection with a change of control.

Termination by Us Other than for Cause, Death or Disability.Under our employment agreement with Mr. Muller, if we terminate
Mr. Muller's employment agreement for a reason other than for death, disability or "Cause," which is defined to include, among other things, theft or embezzlement of a not insignificant amount
of the property (tangible or intangible) of Panolam Holdings or the Company in circumstances that would render him, in the judgment of a reasonable person, manifestly unfit to continue as Chief
Executive Officer and President of the Company or Panolam Holdings; engaging in conduct that constitutes willful gross neglect or willful gross misconduct and that (x) results in significant
economic harm to the Company or Panolam Holdings or (y) results, and reasonably should be expected to result, in acute public embarrassment to the Company or Panolam Holdings; willful and
unjustified failure of Mr. Muller to act in accordance with any material, reasonable and lawful written instruction given to him by the Panolam Holdings Board of Directors concerning

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material
aspects of his duties for the Company or Panolam Holdings and excluding matters outside of his direct personal control; and his conviction for a felony, then:



Termination by Us for Cause or Voluntary Termination by Mr. Muller.Under our employment agreement with Mr. Muller, if we
terminate
Mr. Muller's employment for Cause, then:



Death.Under our employment agreement with Mr. Muller, if he dies during the term of his employment agreement,
then:



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Disability.Under our employment agreement with Mr. Muller, if Mr. Muller becomes disabled during the term of his employment,
then:



Change of Control.Under our employment agreement with Mr. Muller, in the event that a change of control occurs during the term of
Mr. Muller's employment or within one year after the termination of Mr. Muller's employment without cause or by expiration of the term of Mr. Muller's employment pursuant to a
notice of non-extension from the Company, then all stock options then held by Mr. Muller will become fully exercisable. Options vesting upon a notice of non-renewal
delivered within one year of a change of control will remain exercisable for two years from the termination of Mr. Muller's employment. Options vesting in connection with a change of control
that do not involve a notice of non-renewal will remain exercisable for two years from the date of the change of control.

Assuming
Mr. Muller's employment was terminated under each of these circumstances on December 31, 2008, such payments and benefits would have had an estimated value of:

Base
Salary ($)

Bonus ($)

Accelerated
Stock
Options (#)

Other ($)

Total ($)With Cause or Voluntary Termination by Mr. Muller




$
377,845







$
377,845Without Cause Not Associated With a Change of Control

$
650,000

$
377,845




$
1,277,203

$
2,305,048Without Cause Associated With a Change of Control

$
650,000

$
377,845


5,333
(1)
$
1,277,203

$
2,305,048Death

$
162,500

$
377,845







$
540,345Disability

$
1,560,000

$
377,845







$
1,937,845


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If we terminate the employment of Vincent S. Miceli or Jeffrey M. Muller (the "executives") Without Cause, we are obligated to make
certain payments to them and provide them with certain post-termination benefits per the terms of their employment agreements. For these purposes, "Without Cause" is defined to mean any
termination other than a termination for Cause or as a result of the executive's resignation, retirement, death or disability. Under the employment agreements, "Cause" is defined to mean
(i) conviction of or entering a plea of guilty or nolo contendere to a felony, a crime of moral turpitude, dishonesty, breach of trust or unethical business conduct, or any crime involving the
business of the Company or its affiliates; (ii) willful misconduct, willful or gross neglect, fraud, misappropriation, embezzlement, or theft in the performance of the executive's duties, or
otherwise to the detriment of the Company or any of its affiliates; (iii) willful failure to adhere to the policies and practices of the Company or to devote substantially all of the
executive's business time and effort to the affairs of the Company; (iv) breach of the employment agreement in any material respect; (v) the commission of any theft, embezzlement, fraud
or other intentional act of dishonesty involving any other person; or (vi) willful violation of the Company's Protecting Confidential Information Policy, Conflicts of Interest Policy, or
Business Ethics Policy. Without Cause also includes executive's termination of his employment on 30 days' written notice to the Company following the occurrence of any of the following events
without the executive's prior written consent provided that the Company has not cured all grounds for such termination within 20 days after receipt of the executive's written notice:
(i) any reduction in the executive's base salary or target annual bonus or any material reduction in any employee benefit or perquisite enjoyed by the executive, (ii) any material
dimunition in the executive's duties or responsibilities, or (iii) the relocation of the Company's or the executive's principal office to a location more than 50 miles from Shelton,
Connecticut.

In
the event that the executive's employment is terminated Without Cause, the Company will:



The
receipt of these payments and benefits by an executive is conditioned upon his compliance with the non-solicitation and non-competition provisions contained
in the employment agreement during the period that the executive is receiving such payments or benefits.

Assuming
Vincent S. Miceli's employment was terminated Without Cause on December 31, 2008, such payments and benefits would have had an estimated value of $209,188. Assuming
Jeffrey M. Muller's employment was terminated Without Cause on December 31, 2008, such payments and benefits would have had an estimated value of $224,334.

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In addition to the foregoing, any options granted to an executive and vested before the date of termination of executive's employment shall remain exercisable
until the earliest of:



Director Compensation

All members of our board of directors are reimbursed for their usual and customary expenses incurred in connection with attending all
board and other committee meetings. In addition, Mr. Gesseck receives one annual retainer of $40,000 for all of his services to the board of directors and any board committees on which he
serves. In March 2007, Mr. Gesseck also received a grant of options to purchase 50 shares of common stock of Panolam Holdings. No options were granted to Mr. Gesseck in 2008.

The
following table summarizes the fees and other compensation earned by our directors for their service on our Board of Directors and any committees of the Board of Directors during
2008.

Name

Fees Earned or
Paid in Cash
($)

Option
Awards
($)(3)

Total ($)Jean-Pierre L. Conte(1)








Darren J. Gold(1)








J. Ryan Clark(1)








William C. Oehmig(2)








Hunter Nelson(2)








Kent Wallace(2)








Richard H. Gesseck

$
40,000

$
8,554

$
48,554


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Compensation Committee Interlocks and Insider Participation

The members of our compensation committee are Robert J. Muller, Darren J. Gold and Hunter Nelson. Other than Robert J. Muller, no
member of our compensation committee is or was during 2008 an employee, or is or ever has been an officer, of the Company. No executive officer of the Company served as a director or a member of the
compensation committee of another company, one of whose executive officers serves as a member of our board of directors or compensation committee.

The
Sponsors and their affiliates, own over 92% of the beneficial common stock of our ultimate parent company, Panolam Holdings Co. Representatives of the Sponsors hold six of the
eight seats on our board of directors. Darren J. Gold is a member of our compensation committee and a Managing Director of Genstar Capital. Hunter Nelson is a member of our compensation committee and
partner with The Sterling Group. We have entered into certain transactions with the Sponsors relating to the management of the Company, their ownership of Panolam Holdings Co. common stock and
certain related matters. For a description of these transactions, see "Item 13.Certain Relationships and Related Transactions, and Director IndependenceRelationships
and Related Party Transactions between the Company and the Sponsors and their Affiliates."

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

All of our outstanding common stock is owned by Panolam Holdings II Co., 20 Progress Drive, Shelton, Connecticut 06484. All of
the outstanding common stock of Panolam Holdings II Co. is owned by Panolam Holdings Co., 20 Progress Drive, Shelton, Connecticut 06484.

The
following table gives information as of March 15, 2009 about the beneficial ownership of Panolam Holdings Co. common stock, which is its only outstanding class of
stock, by:



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Except
as otherwise indicated, beneficial ownership is based on sole voting and investment power.

Name And Address of Beneficial Owner

Number of
Shares

Percent Of
ClassGenstar Capital Partners IV, L.P.(a)(1)


74,198


46.4
%Stargen IV, L.P.(a)(1)


3,157


2.0
%Sterling Group Partners II, L.P.(b)(2)


60,921


38.1
%Sterling Group Partners II (Parallel), L.P.(b)(2)


16,434


10.3
%Robert J. Muller, Jr.(c)(3)


9,333


5.6
%Stephen C. Feuring(c)(4)


200


*Jeffrey M. Muller(c)(5)


1,267


*Vincent S. Miceli(c)(6)


500


*Jean-Pierre L. Conte(a)(7)


77,355


48.4
%Darren J. Gold(a)





*J. Ryan Clark(a)





*William C. Oehmig(b)(2)(8)(10)


77,355


48.4
%Hunter Nelson(b)(2)(8)


77,355


48.4
%Kent Wallace(b)


40


*Richard H. Gesseck(c)(9)


20


*All directors and executive officers as a group(1)(2)(3)(5)(6)(9)


165,870


99.4
%


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Equity Compensation Plan

Panolam Holdings Co. adopted the 2005 Equity Incentive Plan ("Option Plan") to provide for the granting of
non-qualified stock options to certain key employees and/or directors of the Company. The following table sets forth information regarding the Panolam Holdings Co. equity
compensation plan as of December 31, 2008. Panolam Holdings Co.'s stockholder-approved Option Plan is described further in Note 15, "Stock Options," to the consolidated financial
statements contained in of this report. See also "Item 11. Executive CompensationCompensation Discussion & AnalysisEquity Incentive."

Plan Category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
(c)Equity compensation plans approved by security holders


13,945

$513

3,833Equity compensation plans not approved by security holders


None

Not applicable

Not applicable13,945

$513

3,833


Item 13.    Certain Relationships and Related Transactions, and Director Independence

Relationships and Related Party Transactions between the Company and the Sponsors and their Affiliates

The Company has not adopted a formal, written policy for the review and approval of transactions with related persons. The Board of
Directors of the Company is responsible for reviewing and approving all transactions and proposed transactions between the Company and its directors, executive officers and 5% stockholders and their
immediate family members (each a "related person") where the amount involved exceeds $120,000 and where the related persons have a direct or indirect material interest in the transaction. Since the
acquisition of the Company by the Sponsors in 2005, the only transactions entered into between the Company or its affiliates and any related person (other than ordinary course employment arrangements)
are described below. Each of these transactions was approved by the Board of Directors of the Company or our ultimate parent company, Panolam Holdings Co.

Stockholders Agreement

In connection with the 2005 Acquisition, Panolam Holdings entered into a stockholders agreement with Genstar Capital (and certain of
its related parties), The Sterling Group (and certain of its related

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parties),
Robert J. Muller and certain other members of our management team (and their spouses, if applicable), to whom we refer collectively as the Holders. The stockholders
agreement:



Registration Rights Agreement

In connection with the 2005 Acquisition, Panolam Holdings entered into a registration rights agreement with the Holders. The
registration rights agreement includes the following provisions:



The
registration rights agreement also contains customary provisions with respect to registration procedures, indemnification and contribution rights.

Advisory Services Agreement

In connection with the 2005 Acquisition, Panolam Holdings and the Sponsors entered into an advisory services agreement whereby the
Sponsors agreed to provide management, business strategy, consulting, advisory and financial services with respect to the organization of Panolam Holdings and its subsidiaries, the structuring of the
2005 Acquisition, employee benefit and compensation arrangements and other matters. The agreement also provides that Panolam Holdings and its subsidiaries, jointly and severally, will indemnify the
Sponsors against liabilities relating to their services. For these services, Panolam Holdings paid the Sponsors, at the closing of the 2005 Acquisition, a one-time closing fee of
$7.0 million and reimbursed the Sponsors for their expenses. In addition, Panolam Holdings will pay the Sponsors, in addition to expenses, an annual consulting fee of $1.5 million in the
aggregate, payable pro rata, on a quarterly basis and an advisory fee equal to 2.0% of the aggregate consideration in the event Panolam Holdings
consummates an acquisition or disposition in the future. For the years ended December 31, 2008 and 2007, we paid consulting fees to the Sponsors of approximately $1.9 million and
$1.3 million, respectively. Genstar Capital received approximately $1.0 million and $0.6 million of the consulting fee paid to the Sponsors for the years ended December 31,
2008 and 2007, respectively. The Sterling Group received approximately $0.9 million and $0.7 million of the consulting fee paid to the Sponsors for the years ended December 31,
2008 and 2007, respectively.

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Agreement with Sterling

In connection with the 2005 Acquisition, Panolam Holdings and The Sterling Group entered into a letter agreement that permits The
Sterling Group, in connection with its direct or indirect acquisitions of equity interests of Panolam Holdings, to, among other things: (i) obtain documentation and financial data relating to
the company and its subsidiaries; (ii) consult with and advise the Company's and its subsidiaries' management regarding the operation of the Company and its subsidiaries, (iii) discuss
with the Company and its subsidiaries, their affairs, finances and accounts and (iv) to visit and inspect the Company's and its subsidiaries' properties and facilities. Panolam Holdings must
also provide certain financial statements and prepare certain periodic reports to The Sterling Group.

Director Independence

Panolam does not have securities listed on a national securities exchange or quoted on an inter-dealer quotation system that has
requirements that a majority of its board of directors be independent. Richard H. Gesseck meets the independence requirements of The Nasdaq Stock Market LLC. No other member of Panolam's board
of directors meets those requirements.

Item 14.    Principal Accountant Fees and Services

In addition to retaining Deloitte & Touche LLP ("D&T") to audit the consolidated financial statements of Panolam for
2008, Panolam retained D&T to provide other auditing and advisory services in 2008. Panolam understands the need for D&T to maintain objectivity and independence in its audit of Panolam's financial
statements. To minimize relationships that could appear to impair the objectivity of D&T, Panolam's Audit Committee is required to pre-approve all non-audit work performed by
D&T.

The
aggregate fees billed for professional services by D&T in 2008 and 2007 for these various services were:

Type of Fees

2008

2007Audit Fees

$
1,203,615

$
1,211,121Audit-Related Fees





66,675Tax Fees


1,194


12,500Total

$
1,204,809

$
1,290,296


In
the table above, in accordance with the Securities and Exchange Commission's definitions and rules, "audit fees" are fees Panolam paid D&T for professional services for the audit of
Panolam's consolidated financial statements included in Panolam's Form 10-K, Registration Statement on Form S-4, review of financial statements included in
Panolam's Form 10-Q and for services that are normally provided by the accountant in connection with the review of other filings and consents; "audit-related fees" are fees for
audits and reviews of financial statements to satisfy lender agreement requirements for comfort letter and pension audits; and "tax fees" are fees for tax compliance and other tax consultation related
to transactions consummated by Panolam during 2008 and 2007.

Pre-Approval of Audit and Non-Audit Services

Our Audit Committee is responsible for appointing our independent auditor and approving the terms of the independent auditor's
services. The Audit Committee has established a policy for the pre-approval of all audit and permissible non-audit services to be provided by the independent auditor, as
described below, and
must pre-approve any internal control related service, including any changes in the nature, scope or extent of such services.

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Audit Services

Under the policy, the Audit Committee is to approve the engagement of our independent auditor each fiscal year and
pre-approve each audit and audit-related service to be performed by such independent auditor, including, but not limited to, the audit of our financial statements and the provision of an
attestation report on management's evaluation of our internal controls over financial reporting. As noted above, the Audit Committee must specifically approve, in advance, any proposed change in the
nature, scope or extent of any internal control related service.

Non-Audit Services

In accordance with the pre-approval policy, the Audit Committee must pre-approve non-audit services
that may be performed by the independent auditor during the fiscal year. The Audit Committee will approve the provision of only those non-audit services deemed permissible under the
federal securities laws and regulations. The Audit Committee may delegate to the Chair of the Audit Committee the authority to approve additional permissible non-audit services to be
performed by the independent auditor, provided that the full Audit Committee shall be informed of such approval at its next scheduled meeting.

All
services performed by D&T in fiscal 2008 were pre-approved by the Audit Committee pursuant to the foregoing pre-approval policy.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(1) Consolidated Financial Statements



PageReport of Independent Registered Public Accounting Firm

F-1Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and
2006

F-2Consolidated Balance Sheets as of December 31, 2008 and 2007

F-3Consolidated Statements of Stockholder's (Deficit) Equity for the years ended December 31, 2008, 2007
and 2006

F-4Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006

F-5Notes to Consolidated Financial Statements

F-6


(a)(2) Financial Statement Schedules for the Three Years Ended December 31, 2008

Report of Independent Registered Public Accounting Firm on Schedules

Schedule IIVALUATION AND QUALIFYING ACCOUNTS

Schedules other than those reflected below have been omitted because they are either not applicable or the required information has
been disclosed in the consolidated financial statements or notes thereto.

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SCHEDULE II  PANOLAM INDUSTRIES INTERNATIONAL, INC.  VALUATION AND QUALIFYING ACCOUNTS  Years ended December 31, 2008, 2007 and 2006  (In thousands)

Balance
at
beginning
of period

Charged
(Credited)
to cost
and
expenses

Acquisition

Deductions/Other

Balance
at
end of
period2008 allowance for doubtful accounts

$
7,048

$
(610
)



$
(460
)
$
5,9782007 allowance for doubtful accounts

$
7,252

$
(212
)



$
8

$
7,0482006 allowance for doubtful accounts

$
1,908

$
2,392

$
2,568

$
384

$
7,252


(a)(3) Exhibits

EXHIBIT NUMBER

EXHIBIT TITLE2.1

Agreement and Plan of Merger dated as of July 16, 2005 by and among GS Holdings Co., PIH Acquisition Co., Panolam Industries Holdings, Inc. and TC Group, L.L.C.*2.2

First Amendment to Agreement and Plan of Merger, dated as of July 16, 2005, by and among Panolam Holdings II Co. (formerly GS Holdings Co.), PIH Acquisition Co., Panolam Industries Holdings,
 Inc., and TC Group, L.L.C. entered into effective as of September 30, 2005.*2.3

Acquisition Agreement among Nevamar Holdco, LLC, Nevamar Company, LLC, Nevamar TE S Preferred Corp., Nevamar Offshore S. Preferred Corp., Nevamar Offshore Common Corp., certain holders of interests in
Nevamar Holdco, LLC, Kohlberg Management IV, L.L.C., as Seller's Representative, and Panolam Industries International, Inc. dated as of January 18, 2006.*2.4

Amendment No. 1 to Acquisition Agreement entered into as of February 28, 2006 among Kohlberg Management IV, L.L.C., as representative for the Sellers and Panolam Industries International,
 Inc.*3.1

Certificate of Incorporation of Panolam Industries International, Inc. (previously named PII Third, Inc.).*3.2

Amendment to Certificate of Incorporation of Panolam Industries International, Inc. (previously named PII Third, Inc.) dated December 18, 1997.*3.3

Amendment to Certificate of Incorporation of Panolam Industries International, Inc. (previously named PII Third, Inc.) dated December 22, 1998.*3.4

Certificate of Incorporation of Panolam Industries, Inc. (previously named Pan Acquisition, Inc.).*3.5

Amendment to Certificate of Incorporation of Panolam Industries, Inc. (previously named Pan Acquisition, Inc.).*3.6

Certificate of Incorporation of Pioneer Plastics Corporation (previously named PPC Acquisition Corporation).*3.7

Amendment to Certificate of Incorporation of Pioneer Plastics Corporation (previously named PPC Acquisition Corporation).*


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EXHIBIT NUMBER

EXHIBIT TITLE3.8

By-Laws of Panolam Industries International, Inc. (previously named PII Third, Inc.).*3.9

By-Laws of Panolam Industries, Inc. (previously named Pan Acquisition, Inc.).*3.10

By-Laws of Pioneer Plastics Corporation (previously named PPC Acquisition Corporation).*3.11

Certificate of Incorporation of Nevamar Holding Corp.*3.12

By-Laws of Nevamar Holding Corp.*3.13

Certificate of Formation of Nevamar Holdco, LLC.*3.14

Amended and Restated Limited Liability Company Agreement of Nevamar Holdco, LLC.*3.15

Certificate of Formation of Nevamar Company, LLC (previously named KNDP Acquisition Company, LLC).*3.16

Amendment to Certificate of Formation of Nevamar Company, LLC (previously named KNDP Acquisition Company, LLC).*3.17

Fifth Amended and Restated Limited Liability Company Agreement of Nevamar Company, LLC.*4.1

Indenture dated September 30, 2005 among PIH Acquisition Co., Panolam Industries International, Inc., the Guarantors and Wells Fargo Bank, National Association.*4.2

First Supplemental Indenture dated April 3, 2006 among Panolam Industries International, Inc., Nevamar Holding Corp., Nevamar Holdco, LLC, Nevamar Company, LLC and Wells Fargo Bank, National
Association.*4.3

Registration Rights Agreement for $151,000,000 103/4% Senior Subordinated Notes Due 2013 dated September 30, 2005 among PIH Acquisition Co., Credit Suisse First Boston LLC and
Jefferies & Company, Inc.*4.4

Purchase Agreement for $151,000,000 103/4% Senior Subordinated Notes Due 2013 dated September 16, 2005 among PIH Acquisition Co., Credit Suisse First Boston LLC and
Jefferies & Company, Inc.*4.5

Registration Rights Agreement by and among Panolam Holdings Co. and the holders of the Qualified Registrable Securities.*4.6

Form of New Note (included as Appendix A to Exhibit 4.1).*10.1

Credit Agreement dated as of September 30, 2005 among PIH Acquisition Co., Panolam Industries International, Inc., Panolam Holdings II Co., the Lenders, Credit Suisse and Jefferies &
Company, Inc.*10.2

First Amendment to Credit Agreement, dated as of March 1, 2006, by and among Panolam Industries International, Inc., Panola Holdings II, Co., the financial institutions listed on the signature pages
thereof, Credit Suisse, Cayman Islands Branch, as administrative agent, and the Credit Support Parties listed on the signature pages thereof.*


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EXHIBIT NUMBER

EXHIBIT TITLE10.3

Second Amendment to Credit Agreement, dated as of March 1, 2006, by and among Panolam Industries International, Inc., Panola Holdings II, Co., Credit Suisse, Cayman Islands Branch, as administrative agent,
and the Credit Support Parties listed on the signature pages thereof.*10.4

Third Amendment to Credit Agreement and Limited Waiver dated as of March 30, 2007 by and among Panolam Industries International, Inc., Panolam Holdings II, Co., Credit Suisse, Cayman Islands Branch, as
administrative agent, and the Credit Support Parties listed on the signature pages thereof.*10.5

Security Agreement dated September 30, 2005 by and among Panolam Industries International, Inc. and Credit Suisse.*10.6

Holdings Guaranty dated September 30, 2005 by Panolam Holdings II Co. in favor of Credit Suisse.*10.7

Subsidiary Guaranty dated September 30, 2005 by Panolam Industries, Inc. and Pioneer Plastics Corporation in favor of Credit Suisse.*10.8

Panolam Holdings Co. 2005 Equity Incentive Plan.*10.9

Form of Panolam Holdings Co. 2005 Equity Incentive Plan Employee Non Statutory Stock Option Agreement.*10.10

Panolam Holdings Co. 2005 Equity Incentive Plan Employee Non Statutory Stock Option Agreement with Robert J. Muller, Jr.*10.11

Second Amended and Restated Employment Agreement dated September 6, 2005 by and among Panolam Industries International, Inc., Panolam Industries Holdings, Inc., and Robert J. Muller, Jr.*10.12

Advisory Services Agreement dated September 30, 2005 between Panolam Holdings Co. and Genstar Capital LLC and The Sterling Group, L.P.*10.13

Management Rights Letter from Panolam Holdings Co. to Sterling Group Partners II, L.P. and Sterling Group II (Parallel), L.P.*10.14

Stockholders Agreement between Panolam Holdings Co. and the Holders.*10.15

Employment Agreement dated September 19, 2007 between Panolam Industries International, Inc. and Vincent S. Miceli.*10.16

Employment Agreement dated September 19, 2007 between Panolam Industries International, Inc. and Stephen C. Feuring.*10.17

Employment Agreement dated September 19, 2007 between Panolam Industries International, Inc. and Jeffrey M. Muller.*10.18

2008 Panolam Industries International, Inc. Bonus Plan (incorporated herein by reference to Exhibit 10.18 of Panolam Industries International, Inc.'s Annual Report on Form 10-K filed March 31,
2008).12.1

Statement regarding ratio of earnings to fixed charges.21.1

Subsidiaries of the Registrant.31.1

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


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EXHIBIT NUMBER

EXHIBIT TITLE31.2

Certification pursuant to Exchange Act Rules 13a-14 and 15d-14; as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.32.2

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


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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized in the Town of Shelton, State of Connecticut on the 31st day of March 2009.

PANOLAM INDUSTRIES INTERNATIONAL, INC.By:

/s/ ROBERT J. MULLER Robert J. Muller Chairman, President and Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated, on
the 31st day of March 2009.

Signature

Title/s/ ROBERT J. MULLER, JR. Robert J. Muller, Jr.

Chairman, President and Chief Executive Officer (Principal Executive Officer); Director/s/ VINCENT S. MICELI Vincent S. Miceli

Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)/s/ JEAN-PIERRE L. CONTE Jean-Pierre L. Conte

Director/s/ DARREN J. GOLD Darren J. Gold

Director/s/ J. RYAN CLARK J. Ryan Clark

Director/s/ HUNTER NELSON Hunter Nelson

Director/s/ KENT WALLACE Kent Wallace

Director/s/ RICHARD H. GESSECK Richard H. Gesseck

Director


Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.

The
Registrant has not sent an annual report or proxy material to security holders.

69

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Table of Contents

Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Stockholder of
Panolam Industries International, Inc.
Shelton, Connecticut

We
have audited the accompanying consolidated balance sheets of Panolam Industries International, Inc. and subsidiaries (the "Company") as of December 31, 2008 and 2007,
and the related consolidated statements of operations, stockholder's (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included
the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2008 and 2007,
and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company's significant loss, stockholder's deficit, and the Company's debt covenant violations raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

As
discussed in Note 13 to the consolidated financial statements, on January 1, 2007 the Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes.

/s/
DELOITTE & TOUCHE LLP

Hartford,
Connecticut
March 31, 2009

F-1

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands)

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006NET SALES

$
366,709

$
424,397

$
460,078COST OF GOODS SOLD


305,017


333,529


357,494FIXED ASSET IMPAIRMENT CHARGE


5,165





GROSS PROFIT


56,527


90,868


102,584SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


48,943


51,271


52,783GOODWILL AND OTHER INDEFINITE LIVED INTANGIBLE ASSET IMPAIRMENT CHARGES


121,612





(LOSS) INCOME FROM OPERATIONS


(114,028
)

39,597


49,801INTEREST EXPENSE


29,438


34,891


35,577INTEREST INCOME


(485
)

(612
)

(628
)(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE


(142,981
)

5,318


14,852INCOME TAX (BENEFIT) EXPENSE


(21,325
)

(3,006
)

3,959NET (LOSS) INCOME

$
(121,656
)
$
8,324

$
10,893


See
notes to consolidated financial statements.

F-2

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.  CONSOLIDATED BALANCE SHEETS  DECEMBER 31, 2008 AND 2007  (In thousands, except share data)

Dec. 31,
2008

Dec. 31,
2007ASSETSCURRENT ASSETS:Cash and cash equivalents

$
43,452

$
10,744Accounts receivable, less allowances of $5,978 in 2008 and $7,048 in 2007


14,193


19,269Inventories


55,136


58,151Other current assets


18,575


18,920Total current assets


131,356


107,084PROPERTY, PLANT AND EQUIPMENTNet


218,330


265,045GOODWILL





102,460INTANGIBLE ASSETSNet


52,083


82,921DEBT ACQUISITION COSTSNet


7,057


8,814OTHER ASSETS


3,457


35TOTAL

$
412,283

$
566,359LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITYCURRENT LIABILITIES:Accounts payable

$
6,913

$
11,780Accrued liabilities


19,585


25,667Current portion of long-term debt


343,937


47Other current liabilities





1,313Total current liabilities


370,435


38,807LONG-TERM DEBT, LESS CURRENT PORTION


13


319,894DEFERRED INCOME TAXES


61,498


81,229DUE TO PANOLAM HOLDINGS CO.





5,619OTHER LIABILITIES


8,216


4,848Total liabilities


440,162


450,397COMMITMENTS AND CONTINGENCIES (Note 16)STOCKHOLDER'S (DEFICIT) EQUITY:Common stock, $.01 par value200 shares authorized, 200 shares outstanding





Additional paid-in capital


81,528


81,038Accumulated (deficit) earnings


(104,434
)

17,222Accumulated other comprehensive (loss) income


(4,973
)

17,702Total stockholder's (deficit) equity


(27,879
)

115,962TOTAL

$
412,283

$
566,359


See
notes to consolidated financial statements.

F-3

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

Common Stock





Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockholder's
(Deficit)
EquityAdditional
Paid-in
Capital

Accumulated
Earnings
(Deficit)

Comprehensive
Income (Loss)Shares

AmountBALANCEDecember 31, 2005


200

$


$
80,118

$
(1,995
)
$
(368
)
$
77,755Net income for the year ended December 31, 2006











10,893





10,893

$
10,893Stock option expense








487








487Repurchase and cancellation of common stock








(50
)







(50
)Other comprehensive income (loss):Foreign currency translation adjustment














28


28


28Minimum pension liabilitynet of income taxes of $65














(172
)

(172
)

(172
)Comprehensive income



















$
10,749BALANCEDecember 31, 2006


200





80,555


8,898


(512
)

88,941Net income for the year ended December 31, 2007











8,324





8,324

$
8,324Stock option expense








483








483Adjustment to initially apply FAS 158, net of tax














217


217Other comprehensive income:Foreign currency translation adjustment














17,650


17,650


17,650Minimum pension liabilitynet of income taxes of $174














347


347


347Comprehensive income



















$
26,321BALANCEDecember 31, 2007


200





81,038


17,222


17,702


115,962Net loss for the year ended December 31, 2008











(121,656
)




(121,656
)

(121,656
)Stock option expense








490








490Other comprehensive (loss):Foreign currency translation adjustment














(22,373
)

(22,373
)

(22,373
)Amortization of pension costs














(302
)

(302
)

(302
)Comprehensive loss



















$
(144,331
)BALANCEDecember 31, 2008


200

$


$
81,528

$
(104,434
)
$
(4,973
)
$
(27,879
)


See notes to consolidated financial statements.

F-4

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands)

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income

$
(121,656
)
$
8,324

$
10,893Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation and amortization


31,305


30,230


25,408Fixed asset impairment charge


5,165





Goodwill and other indefinite lived intangible asset impairment charges


121,612





Deferred income tax benefit


(19,775
)

(492
)

(5,143
)Amortization of debt acquisition costs


1,757


2,341


3,247Stock based compensation expense


490


483


487Other


499


(2
)

181Changes in operating assets and liabilities, net of acquisitions:Accounts receivable


4,659


3,091


13,263Inventories


1,838


(1,765
)

5,512Other current assets


1,063


(909
)

(1,851
)Accounts payable and accrued liabilities


(12,552
)

(7,111
)

(13,151
)Income taxes payable/receivable


1,812


(5,011
)

4,264Other


(714
)

(1,094
)

(802
)Net cash provided by operating activities


15,503


28,085


42,308CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment


(3,407
)

(8,838
)

(12,619
)Acquisition, net of acquired cash








(77,801
)Net cash used in investing activities


(3,407
)

(8,838
)

(90,420
)CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of long-term debt


(2,043
)

(20,000
)

(25,098
)Settlement of amount due to Panolam Holdings Co.


(2,482
)




Proceeds from long-term debt





3


80,000Borrowings under revolving credit facility


25,928





5,000Payment of debt acquisition costs





(405
)

(2,764
)Repurchase and cancellation of common stock








(50
)Repayment of borrowings under revolving credit facility








(5,000
)Net cash provided by (used in) financing activities


21,403


(20,402
)

52,088EFFECT OF EXCHANGE RATE CHANGES ON CASH


(791
)

1,050


NET CHANGE IN CASH AND CASH EQUIVALENTS


32,708


(105
)

3,976CASH AND CASH EQUIVALENTBeginning of period


10,744


10,849


6,873CASH AND CASH EQUIVALENTSEnd of period

$
43,452

$
10,744

$
10,849SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash payments for interest

$
27,777

$
32,873

$
32,032Cash payments for income taxes, net of refunds

$
(4,286
)
$
2,497

$
4,726


See notes to consolidated financial statements.

F-5

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Table of Contents



PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

1. BUSINESS AND BASIS OF PRESENTATION

Panolam Industries International, Inc. (the "Company") designs, manufactures and distributes decorative overlay products, primarily thermally fused melamine panels ("TFMs") and
high-pressure laminate sheets ("HPLs"), throughout the United States and Canada. The Company markets its products through independent distributors and directly to kitchen and bathroom
cabinet, furniture, and store fixture original equipment manufacturers ("OEMs"). The Company wholly-owns, the following companies:



The
Company's consolidated financial statements include the accounts of Panolam Industries International, Inc. and its subsidiaries and have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures at the date of the Company's consolidated financial statements. On an on-going basis,
management evaluates its estimates and judgments, including those related to bad debts, discounts and rebates, inventories, income taxes, long-lived assets, and share-based payments.
Management bases its estimates and judgments on historical experience and current market conditions and on various other factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions. Management considers the Company's policies on revenue recognition, adjustments for slow moving and obsolete inventories, potentially uncollectible accounts
receivable, accruals for customer rebates, income taxes, goodwill, intangible assets and long-lived assets and stock options to be critical accounting policies due to estimates,
assumptions, and application of judgment involved in each. See Note 4, "Summary of Significant Accounting Policies" for additional discussion of the Company's policies.

The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result from the
outcome of the going concern uncertainty. This assumes a continuation of operations and the realization of assets and liabilities in the ordinary course of business. The Company had a net loss of
$121,656 for the year ended December 31, 2008. The net loss is principally attributable to $96,691 of goodwill impairment and $24,921 of trade name impairments taken during the year as well as
insufficient revenue to cover the Company's high percentage of fixed costs, including the interest costs on its debt and depreciation expense. The Company also had a stockholder's deficit of $27,879
at December 31, 2008. As discussed in Note 11, "Debt and Capital Lease Obligations," as of December 31, 2008, the Company was not in compliance with all of its financial and
reporting covenants under the Credit Facility, which constitutes a default. As a result, the lenders have the ability to accelerate the payment obligations and, in the event there was availability
under the revolver, the Company would not be permitted to borrow funds until its noncompliance is cured or waived by the lenders. The Company does not expect to be in compliance with the financial
covenants as of March 31, 2009, the next compliance measurement date.

F-6

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

1. BUSINESS AND BASIS OF PRESENTATION (Continued)

On
February 27, 2009, the Company received a notice of default from the agent for the lenders under its Credit Facility due to the Company's failure to comply with certain
financial and reporting covenants. On March 31, 2009, the Company entered into a forbearance agreement with its lenders pursuant to which they have agreed to forbear exercising any rights and
remedies under the Credit Facility relating to these defaults, including their right to accelerate the Company's payment obligations under the Credit Facility, until the earlier of
(i) June 30, 2009, (ii) the occurrence of an event of default under the Forbearance Agreement or (iii) the fulfillment of all obligations under the Forbearance Agreement
and the Credit Facility and the termination of the Credit Facility. The terms of the Forbearance Agreement prohibit the Company from, among other things, paying the April 1, 2009 interest
payment on the Notes. Failure to make such interest payment is a default under the indenture governing the Notes and entitles the holders of the Notes (after a thirty day grace period) to accelerate
the Company's obligations under the Notes. In addition, if the Company is unable to restructure or refinance the Credit Facility, its lenders could accelerate its payment obligations under the Credit
Facility and, because of cross default provisions, the holders of the Notes would have the right to accelerate the Company's obligations under the Notes. Based on these acceleration rights, the
Company has reclassified approximately $343.9 million from long-term debt to current debt as of December 31, 2008.

In
the event that most or all of the Company's obligations under the Credit Facility and Notes become due and payable, the Company would be unable to fund its payment obligations. The
Company is in active discussions with its lenders to restructure its debt obligations; however, given the current negative conditions in its industry and the economy generally and the credit markets
in particular, the Company cannot give any assurance that it will be successful in restructuring its debt or finding alternative financing arrangements. The Company has engaged financial and legal
advisors to assist them in these discussions, but if the Company is not able to find a timely solution, it may be compelled to file for bankruptcy protection.

As
a result of the these factors, there is substantial doubt about the Company's ability to continue as a going concern.

2. THE TRANSACTION

On July 16, 2005, Panolam Industries Holdings, Inc. ("Old Holdings") (which at the time was controlled by affiliates of The Carlyle Group), entered into an agreement and
plan of merger (the "Merger Agreement") providing for the merger of PIH Acquisition Co. ("PIH"), a subsidiary of Panolam Holdings II Co. ("Holdings II"), into Old Holdings for aggregate
cash consideration of $347,500 less funded debt at closing and certain expenses of the transaction.

In
addition, $4,000 of the merger consideration was paid into escrow pending determination of any working capital adjustment following calculation of the working capital on the Closing
Date, pursuant to terms and conditions specified in the Merger Agreement. On September 30, 2005 (the "Closing Date"), pursuant to the terms of the merger agreement, PIH was merged with and into
Old Holdings. Immediately following the merger on the Closing Date, Old Holdings was merged through a series of transactions with and into Panolam Industries International, Inc. The Company
refers to these merger transactions as the Merger or Transaction. The Merger was accounted for using the purchase method of accounting.

F-7

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

2. THE TRANSACTION (Continued)

The
parent of Holdings II, Panolam Holdings Co. ("Panolam Holdings"), is controlled by Genstar Capital LLC ("Genstar Capital") and The Sterling Group (collectively the
"Sponsors").

Financing
for the acquisition consisted of the following (see Note 11):



3. THE ACQUISITION OF NEVAMAR

On March 1, 2006, Panolam Industries International, Inc. acquired all of the outstanding equity securities of Nevamar Holdco, LLC, the parent of Nevamar
Company, LLC ("Nevamar") a leading manufacturer of decorative surface products. Nevamar is included in the results of the Company beginning on March 1, 2006. Nevamar designs and sells
decorative laminates and other surfacing materials used in the commercial and residential furniture, fixtures and cabinet markets, as well as the graphic arts industry. The total consideration paid
for Nevamar was $80,000, consisting of $75,000 in cash and the issuance by Panolam to the sellers of $5,000 of junior subordinated notes. At the time of closing, $1,000 of the purchase price was put
into an escrow account, which was ultimately returned to the Company in the
form of a working capital adjustment pursuant to the acquisition agreement. In addition, the Company incurred $3,863 in closing costs related to the Nevamar acquisition. Certain indemnity claims
Panolam may have under the acquisition agreement may be offset against the subordinated notes issued to the sellers. At December 31, 2007, the Company offset approximately $138 in claims
against the junior subordinated notes. In January 2008, the Company settled the junior subordinated notes with the sellers for $2,377 and as part of the settlement agreement, the Company will no
longer be indemnified by the sellers for certain claims. As a result of the settlement, the intercompany payable to the Company's parent, Panolam Holdings Co., was no longer outstanding as of
December 31, 2008 and the Company recorded liabilities in accrued liabilities and other liabilities in anticipation of such unindemnified claims. In addition, the Company incurred $105 in legal
and bank fees related to this settlement. In connection with the Nevamar acquisition, the Company expanded its Credit Facility and borrowed an additional $80,000 of long-term debt. Debt
acquisition costs related to the $80,000 loan totaled $2,764. See Note 9.

In
connection with this acquisition, purchase accounting was applied and completed, and all assets were revalued based on valuations and other studies. No goodwill resulted from this
acquisition because the fair value of assets acquired was in excess of the cost of this acquisition. Such excess fair value was used to reduce the allocated costs of the assets acquired. Of the $9,164
of acquired intangible assets, $6,138 was assigned to key customer lists, $2,753 to trademarks and patents and other assets of $273. The acquired intangibles assets have a total weighted-average
useful life of approximately 13 years.

F-8

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

3. THE ACQUISITION OF NEVAMAR (Continued)

The
following unaudited pro forma consolidated financial statements have been prepared from the statement of operations for the year ended December 31, 2006 to give effect to our
acquisition of Nevamar. The acquisition occurred on March 1, 2006 and the following pro forma statement gives effect as if the acquisition had occurred on January 1, 2006. The
assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma consolidated financial data.

The
unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma
consolidated financial data do not purport to represent what the results of operations or financial condition would have been had the Nevamar acquisition actually occurred on the date indicated, nor
do they purport to project the results of the operations or financial condition for any future period or as of any future date.

Panolam Industries International, Inc.  Unaudited Pro Forma Consolidated Statement of Operations  Year Ended December 31, 2006  (in thousands)

Successor
Historical

Nevamar
Adjustments
(1)

Purchase
Accounting
Adjustments

Pro
FormaNet sales

$
460,078

$
33,109

$


$
493,187Cost of goods sold(4)


357,494


27,117


532
(2)

385,143Gross profit (loss)


102,584


5,992


(532
)

108,044Selling, general and administrative expenses


52,783


5,109


127
(2)

58,019Income (loss) from operations


49,801


883


(659
)

50,025Interest expense


35,577


281


807
(3)

36,665Interest income


(628
)

(12
)




(640
)Income (loss) before income taxes (benefit)


14,852


614


(1,466
)

14,000Income taxes (benefit)


3,959





(328
)(5)

3,631Net income (loss)

$
10,893

$
614

$
(1,138
)
$
10,369


---

F-9

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

3. THE ACQUISITION OF NEVAMAR (Continued)

Interest on new borrowings(a)

$
954Increase in amortization of debt acquisition cost


68Interest on new borrowings(b)


66Nevamar interest expense(c)


(281
)$
807






4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Principles
of ConsolidationThe consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have
been eliminated.

Revenue
RecognitionRevenues are recognized upon shipment of products to customers, at which time, the price is fixed and determinable, collectibility is reasonably assured
and all the provisions agreed to in the arrangement necessary for customer acceptance have been fulfilled. The date of shipment corresponds to the date upon which the customer takes ownership of the
product. Sales, including shipping charges, are recorded net of applicable provisions for discounts and allowances including customer rebates.

Cash
and Cash EquivalentsCash and cash equivalents include short-term, highly liquid investments with original maturities of three months or less when purchased.
The majority of our money market funds at December 31, 2008 were maintained with one financial institution. We maintain our cash deposits and cash equivalents with well-known and
stable financial institutions. However, we

F-10

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

have
significant amounts of cash and cash equivalents at these financial institutions that are in excess of federally insured limits. This represents a concentration of credit risk. With the current
financial environment and the instability of financial institutions we cannot be assured that we will not
experience losses on our deposits, however, we have not experienced any losses on our deposits of cash and cash equivalents to date.

Allowance
for Uncollectible Accounts; Discounts and RebatesThe Company reviews its trade accounts receivable balances for collectibility on a regular basis and whenever
events and circumstances indicate that the carrying amount may not be collectible and provides for any unrealizable amounts. In making such determinations, the Company uses its industry experience,
customer history and current economic factors. In addition, the Company provides allowances for cash discounts based on the average annual expected discounts and also provides for rebates based on
experience by customer and the current period's rebatable sales projections.

InventoriesInventories
are stated at the lower of cost using the first-in first-out method or market.

Inventory
AdjustmentsThe Company provides adjustments for excess, slow-moving and obsolete raw materials and finished goods based on estimates of future
projections and current conditions.

Property,
Plant and EquipmentProperty, plant and equipment is stated at cost. Significant additions, major renewals and improvements are capitalized and depreciated while
expenditures for maintenance and repairs are charged to operations as incurred. Long-lived assets are reviewed for impairment whenever facts and circumstances indicate that the carrying
amount may not be fully recoverable. Depreciation is computed using the straight-line method for financial reporting purposes. Estimated useful lives for financial reporting purposes are
as follows:

Buildings and improvements

20 to 40 yearsMachinery and equipment

3 to 20 years


Goodwill
and Indefinite-Lived Intangible AssetsGoodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, or whenever
circumstances indicate that impairment may have occurred. The Company performs its required impairment tests of goodwill and other indefinite lived intangible assets as of each December 31. The
Company performed its required impairment tests of goodwill and other indefinite lived intangible assets as of December 31, 2008 and recorded impairment charges of $96,691 and $24,921 for
goodwill and other indefinite lived intangible assets, respectively. No impairment was required to be recognized in 2007 or 2006.

InvestmentsThe
Company maintained no investments at December 31, 2008 and 2007.

Impairment
of Long-Lived Assets and Other Finite Life IntangiblesLong-lived assets, including property, plant and equipment and other finite life
intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that their respective carrying amounts may not be recoverable by applying a recoverability test
based on projections of undiscounted future cash flows. If estimates of future undiscounted cash flows are insufficient to recover the carrying value of the long-lived asset group, the
Company compares the fair value of the asset group to the net book value to determine if the carrying value is impaired. As a result of testing during the fourth quarter, the Company recorded $5,165
in impairment of fixed assets.

F-11

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign
Currency TranslationThe local currency is the functional currency for the Company's Canadian operation. Assets and liabilities denominated in Canadian dollars are
translated at the exchange rate in effect at the balance sheet date. Statement of operations amounts are translated using the average exchange rate for the year. The gains and losses resulting from
the changes in the exchange rates from year to year are reported in other comprehensive income (loss) as a separate component of stockholder's (deficit) equity.

Shipping
and Handling CostsShipping and handling costs of $19,947, $22,337 and $26,721 for the years ended December 31, 2008, 2007 and 2006, respectively, are
recorded in cost of goods sold in the consolidated statements of operations.

Advertising
ExpenseThe cost of advertising is expensed as incurred. The Company incurred $4,110, $2,656 and $2,776 in advertising costs during the years ended
December 31, 2008, 2007 and 2006, respectively.

Research
and Development ExpenseThe cost of research and development is expensed as incurred. The Company incurred $698, $813 and $633 in research and development costs
during the years ended December 31, 2008, 2007 and 2006, respectively.

Debt
Acquisition CostsDebt acquisition costs are amortized over the term of the associated debt as interest expense. These costs are amortized using the interest method.

Pension
ExpensesThe cost of pension benefits earned by the employees covered by defined benefit plans is actuarially determined using the projected benefit method (prorated
on
service), and management's best estimate of expected plan investment performance, salary escalation, terminations and retirement ages of plan members.

Income
TaxesDeferred income taxes are provided on net operating loss carryovers and on the future income tax consequences associated with temporary differences between the
carrying amounts of assets and liabilities for tax and financial reporting purposes. Deferred income tax assets and liabilities are measured using tax rates expected to apply in the years in which
those temporary differences are expected to reverse. The effect of changes in income tax rates is recognized in earnings in the period in which the change occurs. The Company files a
consolidated federal income tax return except for its foreign subsidiary, which files in its local jurisdiction.

Stock
OptionsEffective October 1, 2005, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payments. SFAS
No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value based measurement in accounting generally for all share-based payment
transactions with employees. This method includes estimates and judgments pertaining to term, volatility, risk-free interest rates, dividend yields and forfeiture rates.

SegmentsThe
Company has two reportable segments, decorative laminates and other. Decorative laminates manufactures and distributes decorative laminates, primarily TFM and
HPL, for use in a wide variety of residential and commercial indoor surfacing applications. The Company's other segment includes the production and marketing of a variety of specialty resins for
industrial uses, custom treated and chemically prepared decorative overlay papers and a variety of other industrial laminates.

F-12

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Significant Customers and Concentration of Credit RiskThe Company primarily sells HPLs and TFMs to various distributors and OEM customers. The Company extends credit
to its customers based on an evaluation of their financial condition. The Company reviews its trade accounts receivable balances for collectibility whenever events and circumstances indicate that the
carrying amount may not be collectible and provides currently for any unrealizable amounts.

The
Company had uncollateralized accounts receivable from five nonaffiliated customers approximating 14% and 11% of total gross accounts receivable balances at December 31, 2008
and 2007, respectively. Sales to these five nonaffiliated customers were 8%, 7%, and 9% of consolidated net sales for the years ended December 31, 2008, 2007 and 2006, respectively. No single
customer represented more than 10% of sales or accounts receivable at December 31, 2008 and 2007.

New
Accounting PronouncementsIn March 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 161 expands the current disclosure
requirements of SFAS No. 133, such that entities must now provide enhanced disclosures on a quarterly basis regarding how and why the entity uses derivatives; how derivatives and related hedged
items are accounted for under SFAS No. 133 and how derivatives and related hedged items affect the entity's financial position, performance and cash flow. Pursuant to the transition provisions
of this statement, the Company will adopt SFAS No. 161 in fiscal year 2009 and will present the required disclosures in the prescribed format on a prospective basis. This statement is not
likely to impact the Company's consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements including an amendment of Accounting Research Bulletin ("ARB")
No. 51, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008. It is not expected to have a material impact on the Company's consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which addresses the information that a reporting entity provides in its financial reports about a
business combination and its effects. To accomplish this, this Statement establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, the goodwill acquired in the business combination or a gain from a bargain purchase and how the
acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008. It is not expected to have a material impact on the Company's consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement
No. 115, which became effective in 2008. SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value
measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings.

F-13

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
Company adopted this statement in 2008 and elected not to adopt the fair value option for any of its eligible financial instruments and other items.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands disclosures about fair value measurements. On February 12, 2008, the FASB issued FASB Staff Position 157-2 ("FSP
157-2") that partially deferred the effective date of SFAS No. 157 for one year for non-financial assets and non-financial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. Other than this deferred portion, the Company adopted SFAS No. 157 in 2008 and it did not have a material impact on
its consolidated financial statements. The Company adopted the deferral of FSP 157-2 on January 1, 2009, and such adoption did not have a material impact on its consolidated
financial statements.

5. INVENTORIES

Inventories consist of:

December 31,2008

2007Raw materials

$
23,798

$
25,029Work in process


5,557


5,877Finished goods


25,781


27,245$
55,136

$
58,151


6. OTHER CURRENT ASSETS

Other current assets consist of:

December 31,2008

2007Income taxes receivable

$
5,327

$
5,176Deferred income taxescurrent (see Note 13)


4,728


3,206Prepaid insurance


2,557


2,887Other current assets


5,963


7,651$
18,575

$
18,920


F-14

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

7. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consists of:

December 31,2008

2007Land

$
4,896

$
5,096Buildings and improvements


61,552


66,766Machinery and equipment


226,087


242,269Construction in process


2,334


3,855294,869


317,986Accumulated depreciation


(76,539
)

(52,941
)$
218,330

$
265,045


Depreciation
expense was $27,291, $26,069 and $21,152 for the years ended December 31, 2008, 2007 and 2006, respectively. Depreciation expense related to the
Company's manufacturing processes and administrative functions is included in the consolidated statement of operations in cost of goods sold and selling, general and administrative expenses,
respectively. Capitalized interest expense was zero, $655 and $439 for the years ended December 31, 2008, 2007 and 2006. Capital leases of $15 and $69 at December 31, 2008 and 2007,
respectively, are included in machinery and equipment. As described in Note 4, as a result of testing for recoverability during the fourth quarter, the Company recorded an impairment charge
related to its fixed assets of $5,165.

8. GOODWILL AND INTANGIBLE ASSETS, NET

The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", ("SFAS No. 142") on January 1, 2002. SFAS No. 142 requires that goodwill and other
indefinite-lived intangible assets be tested for impairment at least on an annual basis. The Company performs an annual impairment test at December 31, or more frequently should conditions that
could affect fair value change significantly.

The
Company has two reporting units, as defined under SFAS No. 142: Decorative Laminates and Other. A reporting unit is defined as an operating segment or one level below an
operating segment. The Company's reporting units are equivalent to its operating segments, as there is no discrete financial information available for the separate components of the segment, or all of
the components of the segment have similar economic characteristics. Prior to recording the goodwill impairment charge, $93,772 in recorded goodwill resided under the Company's Decorative Laminate
reporting unit and $2,919 resided under the Other reporting unit.

During
the fourth quarter of 2008, there was continued deterioration in the U.S. economy and the credit markets generally, and particularly in residential and commercial construction,
which resulted in further sales declines. This deterioration had a significant impact on the Company's business and management therefore revised its forward-looking business projections downward, and
used the updated projections to perform the Company's annual test for goodwill impairment on December 31. The first step in the goodwill impairment test compares the fair value of the reporting
unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the impairment. Based on this testing,
management determined that the fair value of both of the reporting units determined under step 1 was less than the carrying value of its reporting units. Accordingly, management performed a step 2
analysis to determine

F-15

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

8. GOODWILL AND INTANGIBLE ASSETS, NET (Continued)

the
extent of the goodwill impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill
value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an
impairment loss should be recognized in an amount equal to that excess. Based on the results of step 2, the Company concluded that the carrying value of the goodwill of both reporting units was fully
impaired. This resulted in a non-cash impairment charge of $96,691. There was no such goodwill impairment charge in 2007 or 2006.

The
Company additionally performed impairment testing related to its indefinite lived intangible assets in accordance with SFAS No. 142. This involves comparing the fair value to
the recorded carrying value of the assets. As a result of this analysis, the Company recorded an impairment charge of $24,921 related to indefinite lived intangible assets. In 2007 and 2006, the
Company did not record any impairment charges related to indefinite lived intangible assets.

The
Company accounts for finite-lived intangible assets under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. These assets
are grouped with other long-lived assets and are reviewed for impairment whenever events or changes in circumstances indicate that their respective carrying amounts may not be recoverable.
Assessment for possible impairment is based on the Company's ability to recover the carrying value of the long-lived asset group from the expected future pre-tax cash flows
(undiscounted and without interest charges). If the expected future cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated
fair value
and carrying value. No impairment charges related to finite lived intangible assets were recorded in 2008, 2007 or 2006.

Intangible
assets, net include the following:

December 31,2008

2007Gross
Carrying
Value

Accumulated
Amortization

Amortization
Lives (Years)

Gross
Carrying
Value

Accumulated
Amortization

Amortization
Lives (Years)Patents and trademarks

$
9,407

$
2,829


3, 12, 14

$
9,134

$
1,853


3, 12, 14Key customer list


43,574


9,270


15


43,574


6,365


15Other


1,220


1,220


3, 10


1,602


1,195


3, 10Trademarks and tradenames with indefinite useful lives


11,201








38,024





$
65,402

$
13,319




$
92,334

$
9,413


Amortization
expense was $4,014, $4,161 and $4,130 for the years ended December 31, 2008, 2007 and 2006, respectively. Expected amortization expense for 2009
through 2013 follows:

2009

$
3,6882010


3,6602011


3,6602012


3,6602013


3,660


F-16

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

9. DEBT ACQUISITION COSTS

At December 31, 2008 and 2007, the debt acquisition costs and accumulated amortization was as follows:

December 31,2008

2007Gross
Carrying
Value

Accumulated
Amortization

Amortization
Lives (Years)

Gross
Carrying
Value

Accumulated
Amortization

Amortization
Lives (Years)Debt Acquisition Costs

$
14,967

$
7,910


7

$
14,967

$
6,153


7


Amortization
of debt acquisition costs for the years ended December 31, 2008, 2007 and 2006, was $1,757, $2,341 and $3,247, respectively. Amortization expense
related to debt acquisition costs is included in interest expense. During 2007, the Company incurred $405 of additional debt acquisition costs associated with the registration of the Notes with the
Securities and Exchange Commission.

10. ACCRUED LIABILITIES

Accrued liabilities consist of:

December 31,2008

2007Salaries, wages and employee benefits

$
5,635

$
9,383Interest


4,058


4,297Customer rebates


2,240


2,383Insurance


2,026


2,336Freight


827


1,590Other


4,799


5,678$
19,585

$
25,667


11. DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt consists of:

December 31,2008

2007Senior Subordinated Notes, due 2013, face amount $151,000 less discount of $590 in 2008 and $714 in 2007, bearing
interest at 10.75%

$
150,410

$
150,286Senior Secured Term Loan, maturing 2012, bearing interest at December 31, 2008 of 3.22% and 7.59% at December 31, 2007


167,586


169,586Revolver borrowings, bearing interest at December 31, 2008
of 4.50%


25,928


Capitalized lease obligations


26


69343,950


319,941Current portion


(343,937
)

(47
)$
13

$
319,894


F-17

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

11. DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)

Senior
Subordinated NotesAs part of the Transaction (see Note 2); the Company issued the Notes on September 30, 2005. Interest is paid
semi-annually in arrears on April 1 and October 1; interest payments commenced on April 1, 2006. The Notes will mature on October 1, 2013. The Company
capitalized a total of $5,420 of financing fees that are being amortized over the life of the Notes. The Notes are guaranteed by all of the Company's subsidiaries including Nevamar, except Panolam
Industries Limited (the Canadian subsidiary). These guarantees are joint and several and full and unconditional.

Senior
Secured Term Loan and Revolving Credit LoanAs part of the Transaction (see Note 2), the Company entered into the Senior Secured Term Loan and Loan (the "Credit
Facility") which originally provided for an aggregate committed amount of up to $155,000 consisting of two tranches; a $135,000 term loan and a $20,000 revolving loan. The term and revolver borrowings
may be designated as base rate or Eurodollar rate borrowings, as defined, plus an applicable interest margin. The applicable interest margin on the revolver is reset quarterly based upon certain
ratios as defined in the credit agreement. As of December 31, 2008, the Company had $25,928 in revolver borrowings and no revolver borrowings at December 31, 2007. The outstanding
revolver borrowings as of December 31, 2008 reflect a decision by the Company to borrow its remaining availability under the revolving credit facility due to the uncertainty in both the economy
and the credit markets and in order to have as much liquidity as possible to respond to further downturns in the business. As of December 31, 2008 and 2007, the Company had letters of credit
issued for worker's compensation claims in an aggregate amount of $4,072 outstanding under the Credit Facility. The term loan portion of the Credit Facility is for 7 years and the revolving
loan portion is for 5 years.

The
original quarterly repayment amount of the term loan facility was $338 with the balance due at September 30, 2012. Subsequent to the amendment of the Credit Facility, the
repayment of the principal amount of the amended term loan facility was scheduled to be paid in quarterly installments of $538 beginning March 31, 2006 with the balance of the principal due on
September 30, 2012. During the years
ended December 31, 2007 and 2006, the Company prepaid $20,000 and $24,539 of its term loan balance, respectively, and during the year ended December 31, 2008, the Company prepaid an
additional $2,000 of its term loan balance. As a result of the prepayments, the Company is no longer required to make any repayment of future principal installments until September 30, 2012,
the loan maturity date. The interest rate on the term loan facility was 3.22% at December 31, 2008.

The
Credit Facility covenants limit, among other things, the Company's ability to incur debt, pay dividends, change its capital structure, make guarantees, assume liens, and dispose of
assets. These covenants include requirements for the Company to maintain a maximum total leverage ratio of 5.0 and a minimum interest coverage ratio of 2.0, as well as an annual maximum capital
expenditures limitation of $8,000 all as of December 31, 2008. The Credit Facility also contains certain customary events of default, which in some instances are subject to grace periods. As of
December 31, 2008, the Company was not in compliance with certain financial and reporting covenants including its leverage and interest coverage covenants under its Credit Facility, which
constitutes a default thereunder. Furthermore, the Company does not expect to be in compliance with the financial covenants as of March 31, 2009, the next compliance measurement date. As a
result, the lenders under the Credit Facility have the ability to accelerate the Company's obligations to make payments under the Credit Facility and, in the event there was availability under
revolver, the Company would not be permitted to borrow funds until the noncompliance is cured or waived by the lenders.

F-18

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

11. DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)

On
February 27, 2009, the Company received a notice of default from the agent for the lenders under its Credit Facility due to the Company's failure to comply with certain
financial and reporting covenants. On March 31, 2009, the Company entered into a forbearance agreement with its lenders pursuant to which they have agreed to forbear exercising any rights and
remedies under the Credit Facility relating to these defaults, including their right to accelerate the Company's payment obligations under the Credit Facility, until the earlier of
(i) June 30, 2009, (ii) the occurrence of an event of default under the Forbearance Agreement or (iii) the fulfillment of all obligations under the Forbearance Agreement
and the Credit Facility and the termination of the Credit Facility. The terms of the Forbearance Agreement prohibit the Company from, among other things, paying the April 1, 2009 interest
payment on the Notes. Failure to make such interest payment is a default under the indenture governing the Notes and entitles the holders of the Notes (after a thirty day grace period) to accelerate
the Company's obligations under the Notes. In addition, if the Company is unable to restructure or refinance the Credit Facility, its lenders could accelerate its payment obligations under the Credit
Facility and, because of cross default provisions, the holders of our Notes would have the right to accelerate the Company's obligations under the Notes. Based on these acceleration rights, the
Company has reclassified approximately $343.9 million from long-term debt to current debt as of December 31, 2008.

In
the event that most or all of the Company's obligations under the Credit Facility and Notes become due and payable, the Company would be unable to fund its payment obligations. The
Company is in active discussions with its lenders to restructure its debt obligations; however, given the current negative
conditions in its industry and the economy generally and the credit markets in particular, the Company cannot give any assurance that it will be successful in restructuring its debt or finding
alternative financing arrangements. The Company has engaged financial and legal advisors to assist them in these discussions, but if the Company is not able to find a timely solution, it may be
compelled to file for bankruptcy protection.

The
indenture governing the Company's Notes also contains a number of covenants that restrict the Company's ability to incur or guarantee additional indebtedness or issue disqualified or
preferred stock, pay dividends or make other equity distributions, repurchase or redeem capital stock, make investments or other restricted payments, sell assets, engage in transactions with
affiliates, create liens or consolidate or merge with or into other companies, and the ability of the Company's restricted subsidiaries to make dividends or distributions to the Company. Future
principal debt payments are expected to be paid with cash flow generated by operations. On March 30, 2009, the agent for the lenders under the Credit Agreement provided the Company with a
"blockage notice" directing the Company not to make an April 1, 2009 interest payment on the Notes.

F-19

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

11. DEBT AND CAPITAL LEASE OBLIGATIONS (Continued)

The Company has used the funds under the Credit Facility, together with the proceeds from the Notes and the capital contribution (see Note 2), to fund the retirement of the
Company's previously outstanding first and second lien loans, to repay the shareholders of the Predecessor Company and for working capital requirements, permitted encumbrances, capital expenditures,
the Nevamar acquisition and other general corporate purposes.

At
December 31, 2008, the Company's future debt principal payments are scheduled as follows and are based on the original terms and conditions of the Company's Credit Facility and
Notes. This schedule does not reflect the condition that if the debt holders chose to accelerate the obligations, all amounts shown below would be due and payable in 2009:

2009

$
2010


25,9282011


2012


167,5862013


150,410$
343,924


The
future principal payments on the Notes due in 2013 are net of the unamortized discount of $590.

At
December 31, 2008, future capital lease payments, including an immaterial amount of interest, are as follows:

2009

$
132010


13$
26


12. EMPLOYEE BENEFIT PLANS

Nevamar Pension PlanNevamar established the Retirement Plan of Nevamar Company, LLC (the "U.S. Plan"), a
noncontributory defined benefit plan, on July 1, 2002. The U.S. Plan was established as a result of the spin-off of Nevamar from International Paper Company ("IP"). The U.S. Plan
covers only employees covered under the collective bargaining agreements maintained and negotiated at facilities in Odenton, MD; Hampton, SC; Franklin, VA; and Waverly, VA.

All
participants in the U.S. Plan immediately preceding the spin-off from IP were credited with service under the IP Pension Plan as of June 30, 2002 for the following
purposes: eligibility to participate, vesting, benefit accrual and eligibility for early retirement and other subsidies. However, the benefit payable to each participant under the U.S. Plan was offset
by the amount of benefit payable under the IP Pension Plan. For all other participants eligibility begins after reaching age 21 and the completion of a year of service except for employees at the
Franklin location who were eligible immediately upon hire. Normal retirement age is 65. Benefits for each of the applicable locations are based on a formula, as defined in the U.S. Plan, and length of
service. The funding policy is to make

F-20

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

12. EMPLOYEE BENEFIT PLANS (Continued)

the
minimum annual contributions required by applicable regulations. This plan was curtailed on May 24, 2004.

Canadian Pension PlanThrough October 1998, the Company maintained a defined benefit pension plan covering certain Canadian
employees (the "International Plan") at which time the Company transferred certain participants into a defined contribution plan. The participants remaining in the defined benefit plan subsequent to
October 1998 continue to participate in such plan. This plan covers certain Canadian employees; the participants remaining in the defined benefit plan subsequent to October 1998 continue to
participate in the plan.

Other Postretirement Benefit PlanThe Company maintains noncontributory life insurance and medical plans that cover all
Canadian employees with over 20 years of service.

The
following table shows the changes in the benefit obligations and the plan assets for the above plans and their funded status. The pension and post-retirement liabilities
are included in Other Liabilities on the Consolidated Balance Sheets.

Pension Plans

Other Post-
Retirement
Benefits2008

2007

2008

2007Changes in benefit obligation:Benefit obligationsbeginning of year

$
15,788

$
14,793

$
2,741

$
2,531Service cost


269


289


51


60Member contributions


52


51





Interest cost


816


779


133


129Actuarial gain


(2,345
)

(1,505
)

(584
)

(358
)Foreign exchange translation


(2,079
)

1,874


(471
)

434Benefits paid


(515
)

(493
)

(54
)

(55
)Benefit obligationsend of year

$
11,986

$
15,788

$
1,816

$
2,741Changes in plan assets:Fair value of plan assetsbeginning of year

$
14,450

$
12,051

$


$
Actual loss on assets


(2,456
)

(310
)




Contributions


1,059


1,439





Member contributions


52


51





Foreign exchange translation


(2,034
)

1,712





Benefits paid


(515
)

(493
)




Fair value of plan assetsend of year

$
10,556

$
14,450

$


$
Funded status recognized in financial statements

$
(1,430
)
$
(1,338
)
$
(1,816
)
$
(2,741
)


F-21

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

12. EMPLOYEE BENEFIT PLANS (Continued)

Weigted-average
assumptions used to determine benefit obligations at December 31, 2008 and 2007 are as follows:

Pension Plans

Other Post-
Retirement Benefits2008

2007

2008

2007Weighted average assumptions:Discount rateU.S. Plan


6.29
%

6.41
%

N/A


N/ADiscount rateInternational Plan


7.25
%

5.30
%

7.25
%

5.30
%Expected return on plan assetsU.S. Plan


7.00
%

7.00
%

N/A


N/AExpected return on plan assetsInternational Plan


6.75
%

7.00
%

N/A


N/ARate of compensation increaseU.S. Plan


N/A


N/A


N/A


N/ARate of compensation increaseInternational Plan


3.00
%

3.00
%

N/A


N/A


Components
of net periodic benefit cost follow:

Pension Plans

Other Post-Retirement BenefitsYear Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006Service cost

$
269

$
289

$
302

$
51

$
60

$
57Interest cost


816


779


648


133


129


115Expected return on plan assets


(955
)

(938
)

(640
)







Amortization


78


150


111


(4
)




Net periodic benefit cost

$
208

$
280

$
421

$
180

$
189

$
172


The pension expense for U.S. and International plans (the "Plans") is calculated based upon a number of actuarial assumptions established on
January 1 of the applicable year, detailed in the table above, including a weighted-average discount rate, rate of increase in future compensation levels and an expected long-term
rate of return on the Plans assets. The discount rate used by the
Company for valuing pension liabilities is based on a review of high quality corporate bond yields with maturities approximating the remaining life of the projected benefit obligations.

The
expected long-term rate of return on the U.S. Plan assets is based on an asset allocation assumption of 53% with equity securities and 47% with debt securities. At
December 31, 2008, the asset allocation was 49% with equity securities and 51% with debt securities.

The
expected long-term rate of return on the International Plan assets is based on the asset allocation guidelines and the return expectation stipulated in the pension plan
investment policy statement, as well as the target asset mix of each fund manager comprised in the plan investment portfolio. The expected long-term rate of return on the International
Plan assets is based on an asset allocation assumption of 30-70% with equity securities, 20-65% with debt securities, and 0-40% with

F-22

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

12. EMPLOYEE BENEFIT PLANS (Continued)

cash
and short term investments. At December 31, 2008 and 2007, the assets were 100% invested in balanced pooled funds, consisting of equity and debt securities. The Company's investment
strategy includes diversification to minimize interest and market risks, and generally does not involve the use of derivative financial instruments. Plan assets are rebalanced periodically to maintain
target asset allocations. Maturities of investments are not necessarily related to the timing of expected future benefit payments, but adequate liquidity to make immediate and medium term benefit
payments is ensured.

The
Company made cash contributions to the U.S. Plan of $286 in 2008 and $527 in 2007, and the U.S. Plan made benefit payments of $112 and $106 in 2008 and 2007, respectively. The
Company made cash contributions to the International Plan of $773 and $912 in 2008 and 2007, respectively. The liability for accrued pension and post employment benefit obligations under all the
Company's pension and post-retirement benefit plans (the "Plans") decreased in 2008 to $3,246 from $4,079 in 2007 primarily due to a significant reduction in plan assets in the U.S. Plan
offset by the cash contributions made to the Plans in 2008 and by the foreign currency translation effect of the foreign pension plans. The Company estimates that, based on current actuarial
calculations, it will make a cash contribution to the Plans in 2009 of approximately $1,092. Cash contributions in subsequent years will depend on a number of factors, including the investment
performance of the plan assets and the impact of the Pension Protection Act of 2006, which was signed into law in August 2006. The Pension Protection Act is effective for plan years beginning in 2008
and did not have a material impact on the Company's consolidated financial condition or results of operations.

For
measurement purposes, the annual rate of increase in the per capita cost of covered health care and dental benefits was assumed to be 8.5% for both 2008 and 2007, respectively. The
rate is assumed to trend down to 5% by 2015 and then stay at 5% per year thereafter. Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care
plan. A 1% change in assumed health care cost trend rates would have the following effects:

1%
Increase

1%
DecreaseEffect on total service and interest cost components

$
10

$
(9
)Effect on post retirement benefit obligation


140


(124
)


The
Company expects to contribute approximately $63 to its other postretirement benefit plan in 2009.

F-23

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

12. EMPLOYEE BENEFIT PLANS (Continued)

Estimated Future Benefit PaymentsThe following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid:

Pension
Plans

Other
Post-Retirement
Benefits2009

$
558

$
632010


706


702011


753


752012


801


922013


910


1122014-2018


5,642


776Total payments


9,370


1,188Less discount for interest


(1,941
)

(393
)Benefit obligations

$
7,429

$
795


Defined Contribution PlansThe Company also sponsors defined contribution plans that are available to substantially all
employees. The Company contributes cash amounts, based upon a percentage of employee contributions, ranging from 1% to 3% of the employees' pay. The amount expensed for the Company match was $1,565,
$1,429 and $1,484 for the years ended December 31, 2008, 2007and 2006.

13. INCOME TAXES

The provision for income tax (benefit) expense consists of:

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006Current:Federal

$
(1,501
)
$
(3,372
)
$
4,036State and local


521


105


1,159Foreign


(19
)

1,052


3,907Total current


(999
)

(2,215
)

9,102Deferred:Federal


(14,794
)

4,527


(908
)State and local


(3,268
)

25


(625
)Foreign


(2,264
)

(5,343
)

(3,610
)Total deferred


(20,326
)

(791
)

(5,143
)Total income tax (benefit) expense

$
(21,325
)
$
(3,006
)
$
3,959


F-24

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

13. INCOME TAXES (Continued)

Components
of deferred income taxes consist of:

December 31,2008

2007Current deferred income tax assets (liabilities):Accounts receivable

$
1,653

$
1,665Inventories


2,788


2,773Payroll and employee benefits


817


1,734Other liabilities and credits


(530
)

(2,966
)Total current deferred income tax assets (liabilities) (See Note 6)


4,728


3,206Non-current deferred income tax assets (liabilities):Loss carryforwards


9,192


7,024Tax credits


2,837


1,382Pension and retiree benefits


476


617Property, plant and equipment


(51,669
)

(60,562
)Intangibles


(10,305
)

(24,712
)Other





3,029Total non-current deferred income tax assets (liabilities)


(49,469
)

(73,222
)Less valuation allowance


12,029


8,007Total non-current deferred income liability, net

$
(61,498
)
$
(81,229
)Net deferred income liability

$
(56,770
)
$
(78,023
)


Based
on projections of future taxable income and the expectation that a significant portion of these deferred income tax assets are to be realized by offsetting them against temporary
items, the Company believes that it is more likely than not that all deferred income tax assets except for federal and state net operating losses and tax credits will be realized.

A
reconciliation of the Company's effective tax rate to the U.S. federal statutory rate follows:

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006U.S. statutory rate


34
%

34
%

34
%Increases (decreases) resulting from:Goodwill impairment


(17
)




Valuation allowance


(3
)




Tax receivable





(52
)

Foreign tax


1


(36
)

(5
)State income taxes, net of federal benefit





2


3Other net, including Transaction costs





(5
)

(5
)Effective tax rate


15
%

(57
)%

27
%


F-25

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

13. INCOME TAXES (Continued)

The
Company has historically reinvested any earnings generated by its Canadian subsidiary. As of December 31, 2008, the Company's Canadian subsidiary had an accumulated deficit.
The Company's effective rate in 2008 was primarily impacted by the portion of the goodwill impairment recorded for
financial reporting purposes (refer to Note 8) which was permanent in nature as a tax deduction for such impairment will never be realized. The Company's effective rate in 2007 was impacted by
a reduction of the deferred tax liability on the books of its Canadian subsidiary, related to a phased-in tax rate reduction established in Canada, as well as the recording of an income
tax receivable related to the Company's decision to seek competent authority with respect to an ongoing audit of the results of its Canadian subsidiary (refer to "Uncertain Tax Positions" below).

The
Company has a foreign tax credit carryover of $1,433 at December 31, 2008 which will expire between 2009 and 2017. The Company has fully offset the foreign tax credit
carryover with a valuation allowance. Additionally, the Company has AMT credits which do not expire totaling $1,404 which are also fully offset by a valuation allowance. The Company also has U.S.
Federal net operating loss carryover of $3,449 which will expire in 2024. The Company has total state net operating loss carryovers, primarily in the state of Connecticut, of $101,998. Such carryovers
generally expire in 2020 and 2028 with the substantial majority expiring between 2020 and 2022. A full valuation allowance against these carryovers has been provided due to uncertainty about the
Company's ability to generate sufficient future income.

Uncertain Tax Positions

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, ("FIN 48"), which
is a comprehensive model for recognition, measurement and disclosure of uncertain tax positions in a company's financial statements. FIN 48 applies to all tax positions accounted for in
accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 permits the recognition of tax benefits from uncertain tax positions only if it is more likely than not that
the tax position will be sustained and is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

The
Company adopted FIN 48 on January 1, 2007. Upon adoption, the total unrecognized tax benefit excluding interest was $2,186, which primarily related to transfer pricing
considerations with the Company's wholly owned Canadian subsidiary. As of the years ended December 31, 2008 and 2007, the Company had total unrecognized tax benefits excluding interest and
penalties of $2,789 and $2,305,

F-26

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

13. INCOME TAXES (Continued)

respectively.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2008 and 2007, is as follows:

2008

2007Unrecognized Tax Benefits:Balance as of January 1,

$
2,305

$
2,186Increase as a result of tax positions taken during a prior year


620


699Decrease as a result of tax positions taken during a prior year





(200
)Increase as a result of positions taken during the current year





258Decrease relating to settlements with taxing authorities


(136
)

(450
)Reduction as a result of a lapse of the statute of limitations





(188
)Balance as of December 31,

$
2,789

$
2,305


The
entire unrecognized tax liability at December 31, 2008, if recognized, would reduce our annual effective tax rate. However, if recognized, the Company believes a significant
portion of this liability would be offset as a result of the competent authority process allowed by the U.S. tax treaty with Canada. The Company is presently under audit in Canada for amounts included
in the above reconciliation, however, the Company does not anticipate this audit being resolved in the short-term. Furthermore, the Company does not believe that the total amount of
unrecognized tax benefits will significantly change within 12 months of the reporting date.

The
Company classifies interest relating to tax matters and tax penalties as a component of income tax expense in its statement of operations. The total amount of accrued interest and
penalties as of December 31, 2008 and 2007 related to FIN 48 was approximately $1,174 and $771, respectively.

The
Company and its subsidiaries file a U.S. federal income tax return and various state filings. Our Canadian subsidiary also files a return in Canada. The U.S. and Canada
generally have a 3 year statute of limitations on tax filings. As a result, the Company has open tax years for U.S. federal and Canadian purposes from 2005 through 2008. With few exceptions,
state statutes follow the open period federally. The Company does have net operating losses (NOLs) for state purposes in some jurisdictions. These NOLs are subject to review based on the year in which
they are utilized. For transfer pricing issues, the US-Canada treaty permits a review of transfer pricing considerations for a 6 year period (as opposed to the general 3 year
stated previously for income tax purposes).

14. RELATED PARTY TRANSACTIONS

The Company pays an annual management fee of $1,500 and reimbursement of out of pocket expenses to the Sponsors. During the years ended December 31, 2008 and 2007, $1,875 and
$1,312 was paid and zero and $375 was accrued for management fees, respectively.

At
December 31, 2007, the Company had an intercompany payable to its ultimate parent company, Panolam Holdings Co. of $5,619, which represented principal and interest
related to the junior subordinated notes that were issued by Panolam Holdings to the sellers of Nevamar. In January 2008, the Company settled the subordinated notes with the sellers for $2,377 and as
part of the settlement

F-27

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

14. RELATED PARTY TRANSACTIONS (Continued)

agreement,
the Company will no longer be indemnified by the sellers for certain claims. As a result of the settlement, the intercompany payable to the Company's parent, Panolam Holdings Co. was
no longer outstanding as of December 31, 2008 and the Company recorded liabilities in accrued liabilities and other liabilities in anticipation of such unindemnified claims. In addition, the
Company incurred $105 in legal and bank fees during the year ended December 31, 2008 related to this settlement.

15. STOCK OPTIONS

On September 30, 2005, the Company instituted the Panolam Holdings Co. 2005 Equity Incentive Plan ("Plan"). The compensation committee of the Board of Directors administers
this Plan, and at least two non-employee directors must be on the committee. The purpose of the Plan is to attract, retain and motivate the Company's executives and its management
employees. The Committee is authorized to approve the grant of any one or combination of stock options, stock appreciation rights, restricted stock, stock units and cash. On September 30, 2005,
the Company granted stock options to an executive officer and management personnel to purchase 15,556 shares of the Company's common stock, exercisable at a price of $500 per share. Through
December 31, 2008, 3,111 of these stock options have been forfeited. These options vest ratably over 5 years. The Company's policy is to issue shares to satisfy stock option exercises.

On
October 1, 2005, the Company adopted SFAS No. 123(R), using fair-value based measurement of accounting. Upon adoption, the Company selected the modified
prospective method. As a result of adopting SFAS No. 123(R), the Company recognized compensation expense for the years ended December 31, 2008, 2007, and 2006 of $490, $483 and $487,
respectively. Such compensation expense is included in selling, general and administrative expense in the statement of operations. The tax benefit related to this expense was $186, $181 and $185 for
the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008 and 2007, there was $965 and $1,451 respectively, of unrecognized compensation expense relating to
outstanding options. The amount at December 31, 2008 will be amortized over the remaining vesting period associated with each grant, and the weighted average expected amortization period is
approximately 1.9 years.

F-28

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

15. STOCK OPTIONS (Continued)

Stock
option activity and the related changes that occurred for the years ended December 31, 2007 and 2008 is summarized as follows:

Outstanding

ExercisableStock
Options
Outstanding

Weighted
Average
Exercise
Price

Stock
Options
Outstanding

Weighted
Average
Exercise
PriceOutstanding, December 31, 2006


14,528


500


2,756


500Granted


800


750





Forfeited


(1,383
)

509


(267
)

500Vested








2,639


500Outstanding, December 31, 2007


13,945


513


5,128


500Granted











Forfeited











Vested








2,789


513Outstanding, December 31, 2008


13,945

$
513


7,917

$
505


The
Company uses the Black-Scholes Merton option-pricing model to calculate the fair value of share-based awards. The key assumptions for this valuation method include the expected term
of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price and forfeiture rate. In determining the fair value of its share-based awards, the Company has
assumed no forfeitures and as a result expects the awards to vest ratably over the five-year vesting period. Many of these assumptions are judgmental and highly sensitive in the
determination of compensation expense. During the year ended December 31, 2007, the Company granted 800 stock options at an exercise price of $750 that vest ratably over five years and have a
weighted average fair value of $332. The Company did not grant any stock options during the year ended December 31, 2008. At December 31, 2008, the Company's outstanding stock options
and the outstanding stock options that are exercisable had weighted average remaining contractual terms of 6.9 years and 6.8 years, respectively. The following table provides the
assumptions used in determining the weighted average fair value for the options granted during each of the respective periods presented, followed by definitions of those terms:

Year Ended
December 31,
2008

Year Ended
December 31,
2007

Year Ended
December 31,
2006Risk-free interest rate





4.52
%

5.01
%Dividend yield








Volatility factor





35
%

36
%Expected term of options





6.5 years


6.5 yearsWeighted average fair value of options




$
332

$
417


TermThis
is the period of time over which the options granted are expected to remain outstanding. Options granted have a maximum term of 10 years. The Company
utilizes the simplified

F-29

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

15. STOCK OPTIONS (Continued)

method
to calculate expected term. An increase in the expected term will increase compensation expense.

VolatilityThis
is a measure of the amount by which a price has fluctuated or is expected to fluctuate. Volatilities are based on implied volatilities from traded options of
a company's shares, historical volatility of a company's shares, and other factors, such as expected changes in volatility arising from planned changes in a company's business operations. An increase
in the expected volatility will increase compensation expense. As the Company does not have a history of trading from which to determine its volatility, the historical stock price volatility of 14
public companies whose lines of business are considered similar to the Company were analyzed, focusing on the stock price trading history of those 14 companies for the years prior to grant date.

Risk-Free
Interest RateThis is the U.S. Treasury rate in effect at the time of the grant having a term equal to the expected term of the option. An increase in
the risk-free interest rate will increase compensation expense.

Dividend
YieldThe Company has no plans to pay dividends in the foreseeable future. An increase in the dividend yield would decrease compensation expense.

16. COMMITMENTS AND CONTINGENCIES

During 2006, the Company's wholly-owned subsidiary, Nevamar Company LLC was named a defendant in numerous workers compensation claims filed on behalf of current and former
employees at the Hampton, South Carolina facility alleging injury in the course of employment due to alleged exposure to asbestos and unidentified chemicals. Under the ownership of Westinghouse
Electric Corporation, the Hampton, South Carolina facility manufactured asbestos-based products until approximately 1975. In 2004 and 2005, Nevamar, Westinghouse and International Paper settled 10
workers' compensation claims related to alleged asbestos exposure. Under a 2005 agreement with International Paper, Nevamar's liability for workers compensation claims related to alleged exposure to
asbestos brought by employees hired before July 1, 2002, was capped at 15% of any damages it shares with International Paper until Nevamar has paid an aggregate of $700 at which point the
Company would have no responsibility for any additional shared damages.

F-30

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

16. COMMITMENTS AND CONTINGENCIES (Continued)

On November 21, 2008, the Company entered into a settlement agreement with IP to settle all of these workers' compensation claims for a cash sum including any related claims that
are filed by any person who was previously employed, is currently employed or becomes employed by Nevamar on or before December 31, 2008 for a cash payment in an amount that had been fully
reserved for by the Company. Employees hired by Nevamar after December 31, 2008 and who file claims related to alleged exposure to asbestos are not covered by this settlement agreement. The
Company paid the settlement amount in November 2008.

The
Company's Auburn, Maine, facility is subject to a Compliance Order by Consent ("COC") dated May 5, 1993, issued by the State of Maine Department of Environmental Protection
("DEP") with regard to unauthorized discharges of hazardous substances into the environment. The Company and the previous owners, named in the COC, are required to investigate and, as necessary,
remediate the environmental contamination at the site. Because the unauthorized discharges occurred during the previous ownership, the previous owners have agreed to be responsible for compliance with
the COC. The previous owners have completed and submitted to the State for its review a risk assessment. The financial obligation of the previous owners to investigate and or remediate is unlimited
except with regard to a portion of the land at the Company's Auburn, Maine, facility, which is capped at $10,000. The Company has recorded a liability of $710 and $717 at December 31, 2008 and
2007, respectively, for site remediation costs in excess of costs assumed by the previous owners. The Company could incur additional obligations in excess of the amount accrued and the Company's
recorded estimate may change over time. The Company expects this environmental issue to be resolved within the next five to ten years.

We
are party to other litigation matters involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability
with respect to such pending litigation matters. However, we believe, based on our examination of such matters, our ultimate costs with respect to such matters, if any, will not have a material
adverse effect on our business, financial condition, results of operations or cash flows.

Lease
CommitmentsMinimum future rental payments under operating leases, determined at December 31, 2008, are as follows:

2009

$
3,2602010


3,2212011


3,2172012


2,8682013


2,035Thereafter


4,246Total amounts due


18,847Less: Sublease payments to be received


(1,523
)$
17,324


Rental
expense was $3,550, $3,548 and $3,904 for the years ended December 31, 2008, 2007 and 2006, respectively.

F-31

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

17. SEGMENT INFORMATION

The Company has determined its operating segments in a manner that reflects how the chief operating decision maker currently reviews the results of the Company's business. The Company
has two reportable segments, decorative laminates and other. Decorative laminates manufactures and distributes decorative laminates, primarily TFM and HPL, for use in a wide variety of residential and
commercial indoor surfacing applications. This segment accounted for approximately 87%, 89% and 89% of the Company's total revenue for the years ended December 31, 2008, 2007 and 2006,
respectively. The Company's other segment includes the production and marketing of a variety of specialty resins for industrial uses, custom treated and chemically prepared decorative overly papers
and a variety of other
industrial laminates including the Company's fiber reinforced plastic product known as FRP. The other segment, net of corporate/eliminations, accounted for 13%, 11% and 11% of the Company's total
revenue for the years ended December 31, 2008, 2007 and 2006, respectively. The amount of net sales reflected in the corporate/eliminations column in the tables below primarily represents the
elimination of the intercompany sales of the other segment to the decorative laminates segment. The other amounts reflected in this column related to expenses, capital expenditures and total assets
associated with the Company's Corporate office. Certain corporate expenses are generally not allocated to specific operating segments and are accordingly reflected in the Corporate/Eliminations column
in the tables below.

The
Company uses the following key information in evaluating the performance of each segment:

As of December 31, 2008 and for the Year Ended
December 31, 2008Decorative
Laminates

Other

Corporate/
Eliminations

TotalNet sales

$
317,929

$
54,338

$
(5,558
)
$
366,709Gross profit


51,698


4,829





56,527Loss from operations


(87,717
)

(773
)

(25,542
)

(114,028
)Depreciation and amortization expense


24,560


3,620


3,125


31,305Fixed asset impairment charge


5,165








5,165Goodwill and other indefinite lived intangible asset impairment charges


118,043


3,569





121,612Capital expenditures


2,243


728


436


3,407Total assets


266,864


47,860


97,559


412,283




As of December 31, 2007 and for the Year Ended
December 31, 2007Decorative
Laminates

Other

Corporate/
Eliminations

TotalNet sales

$
375,627

$
57,349

$
(8,579
)
$
424,397Gross profit


84,582


6,286





90,868Income (loss) from operations


59,272


4,513


(24,188
)

39,597Depreciation and amortization expense


24,100


3,090


3,040


30,230Capital expenditures


3,406


5,250


182


8,838Total assets


391,465


55,497


119,397


566,359


F-32

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Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

17. SEGMENT INFORMATION (Continued)



As of December 31, 2006 and for the Year Ended
December 31, 2006Decorative
Laminates

Other

Corporate/
Eliminations

TotalNet sales

$
411,561

$
57,043

$
(8,526
)
$
460,078Gross profit


93,750


8,834





102,584Income (loss) from operations


70,936


4,838


(25,973
)

49,801Depreciation and amortization expense


20,554


1,908


2,946


25,408Capital expenditures


3,613


8,770


236


12,619Total assets


397,584


51,436


122,722


571,742


Net
sales by geographic area were:

Year Ended
December 31, 2008

Year Ended
December 31, 2007

Year Ended
December 31, 2006United States

$
299,078

$
352,884

$
384,627Canada


62,253


66,009


70,348Other


5,378


5,504


5,103$
366,709

$
424,397

$
460,078


No
single customer accounted for more than 10% of the Company's consolidated net sales for any of the above periods.

Long-lived
assets by geographic area were as follows:

December 31,
2008

December 31,
2007United States

$
210,464

$
328,484Canada


70,463


130,791$
280,927

$
459,275


18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS

The Notes issued September 30, 2005 by Panolam Industries International, Inc. are guaranteed by Panolam Industries, Inc., Pioneer Plastics Corporation and Nevamar
Holding Corp. Supplemental consolidating condensed financial statements for the parent company, subsidiary guarantors and the non-guarantor are presented below. Investments in subsidiaries
are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries eliminate investments in subsidiaries, intercompany balances and
intercompany transactions. The income tax expense (benefit) that is reflected in the Parent Company column on the consolidating condensed

F-33

---



Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (Continued)

statements
of operations for the periods presented also includes the income tax expense (benefit) that pertains to the Subsidiary Guarantors.

Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Balance Sheets
December 31, 2008Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalASSETSCurrent assets:Cash and cash equivalents

$
41,684

$
(1,093
)
$
2,861

$


$
43,452Accounts receivable, net


568


12,113


1,512





14,193Inventories





50,142


4,994





55,136Other current assets


10,559


3,533


4,483





18,575Total current assets


52,811


64,695


13,850





131,356Property, plant and equipment, net


1,471


148,839


68,020





218,330Intangible assets, net


31,753


17,924


2,406





52,083Debt acquisition costs, net


7,057











7,057Other assets


3,420





37





3,457Intercompany receivables





199,219


23,534


(222,753
)

Investment in subsidiaries


501,151








(501,151
)(a)

Total

$
597,663

$
430,677

$
107,847

$
(723,904
)
$
412,283LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITYCurrent liabilities:Accounts payable

$
169

$
5,594

$
1,150

$


$
6,913Accrued liabilities


12,223


6,063


1,299





19,585Current portion of long-term debt


343,926


11








343,937Total current liabilities


356,318


11,668


2,449





370,435Long-term debt, less current portion





13








13Deferred income taxes


46,471





15,027





61,498Other liabilities





2,509


5,707





8,216Intercompany payables


222,753








(222,753
)

Total liabilities


625,542


14,190


23,183


(222,753
)

440,162Total stockholder's (deficit) equity


(27,879
)

416,487


84,664


(501,151
)(a)

(27,879
)Total

$
597,663

$
430,677

$
107,847

$
(723,904
)
$
412,283


---

F-34

---



Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (Continued)

Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Balance Sheets
December 31, 2007Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalASSETSCurrent assets:Cash and cash equivalents

$
9,202

$
(2,553
)
$
4,095

$


$
10,744Accounts receivable, net


1,445


15,664


2,160





19,269Inventories





52,056


6,095





58,151Other current assets


12,217


4,262


2,441





18,920Total current assets


22,864


69,429


14,791





107,084Property, plant and equipment, net


1,561


171,251


92,233





265,045Goodwill


12,060


61,494


28,906





102,460Intangible assets, net


39,067


34,202


9,652





82,921Debt acquisition costs, net


8,814











8,814Other assets


35











35Intercompany receivables





155,385


20,993


(176,378
)

Investment in subsidiaries


607,811








(607,811
)(a)

Total

$
692,212

$
491,761

$
166,575

$
(784,189
)
$
566,359LIABILITIES AND STOCKHOLDER'S EQUITYCurrent liabilities:Accounts payable

$
230

$
7,763

$
3,787

$


$
11,780Accrued liabilities


13,979


9,987


1,701





25,667Current portion of long-term debt


30


17








47Other current liabilities








1,313





1,313Total current liabilities


14,239


17,767


6,801





38,807Long-term debt


319,872


22








319,894Deferred income taxes


60,142





21,087





81,229Due to Panolam Holdings Co.


5,619











5,619Other liabilities





1,476


3,372





4,848Intercompany payables


176,378








(176,378
)

Total liabilities


576,250


19,265


31,260


(176,378
)

450,397Total stockholder's equity


115,962


472,496


135,315


(607,811
)(a)

115,962Total

$
692,212

$
491,761

$
166,575

$
(784,189
)
$
566,359


---

F-35

---



Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (Continued)

Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Statements of Operations
For the Year Ended December 31, 2008Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalNet sales

$


$
296,285

$
72,209

$
(1,785
)
$
366,709Cost of goods sold





234,036


72,766


(1,785
)

305,017Fixed asset impairment charge





5,165








5,165Gross profit (loss)





57,084


(557
)




56,527Selling, general and administrative expenses


26,019


20,995


1,929





48,943Goodwill and other indefinite lived intangible asset impairment charges


16,787


76,369


28,456





121,612Loss from operations


(42,806
)

(40,280
)

(30,942
)




(114,028
)Interest expense


29,434


4








29,438Interest income


(439
)

(3
)

(43
)




(485
)Loss before income tax benefit and equity in net loss of subsidiaries


(71,801
)

(40,281
)

(30,899
)




(142,981
)Income tax benefit


(19,041
)




(2,284
)




(21,325
)Loss before equity in net loss of subsidiaries


(52,760
)

(40,281
)

(28,615
)




(121,656
)Equity in net loss of subsidiaries


(68,896
)







68,896


Net loss

$
(121,656
)
$
(40,281
)
$
(28,615
)
$
68,896

$
(121,656
)




Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Statements of Operations
For the Year Ended December 31, 2007Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalNet sales

$


$
344,621

$
83,728

$
(3,952
)
$
424,397Cost of goods sold





259,633


77,848


(3,952
)

333,529Gross profit





84,988


5,880





90,868Selling, general and administrative expenses


22,290


24,456


4,525





51,271Income (loss) from operations


(22,290
)

60,532


1,355





39,597Interest expense


34,888


3








34,891Interest income


(464
)




(148
)




(612
)Income (loss) before income taxes and equity in net income of subsidiaries


(56,714
)

60,529


1,503





5,318Income taxes (benefit)


1,291





(4,297
)




(3,006
)Income (loss) before equity in net income of subsidiaries


(58,005
)

60,529


5,800





8,324Equity in net income of subsidiaries


66,329








(66,329
)

Net income

$
8,324

$
60,529

$
5,800

$
(66,329
)
$
8,324


F-36

---



Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (Continued)

Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Statements of Operations
For the Year Ended December 31, 2006Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalNet sales

$


$
367,486

$
98,287

$
(5,695
)
$
460,078Cost of goods sold





280,793


82,396


(5,695
)

357,494Gross profit





86,693


15,891





102,584Selling, general and administrative expenses


25,973


24,405


2,405





52,783Income (loss) from operations


(25,973
)

62,288


13,486





49,801Interest expense


35,574


3








35,577Interest income


(388
)

(17
)

(223
)




(628
)Income (loss) before income taxes and equity in net income of subsidiaries


(61,159
)

62,302


13,709





14,852Income taxes


2,920





1,039





3,959Income (loss) before equity in net income of subsidiaries


(64,079
)

62,302


12,670





10,893Equity in net income of subsidiaries


74,972








(74,972
)

Net income

$
10,893

$
62,302

$
12,670

$
(74,972
)
$
10,893


F-37

---



Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (Continued)

Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Statements of Cash Flows
Year Ended December 31, 2008Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalCash flows from operating activities:Net loss

$
(121,656
)
$
(40,281
)
$
(28,615
)
$
68,896

$
(121,656
)Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation and amortization


2,980


20,286


8,039





31,305Fixed asset impairment charge





5,165








5,165Goodwill and other indefinite lived intangible asset impairment charges


16,787


76,369


28,456





121,612Deferred income tax benefit


(17,513
)




(2,262
)




(19,775
)Amortization of debt acquisition costs


1,757











1,757Stock based compensation expense


490











490Equity in net income (loss) of subsidiaries


68,896








(68,896
)

Other


(366
)

463


402





499Changes in operating assets and liabilities:Accounts receivable


877


3,551


231





4,659Inventories





1,914


(76
)




1,838Other current assets


467


729


(133
)




1,063Accounts payable and accrued liabilities


(2,954
)

(7,619
)

(1,979
)




(12,552
)Income taxes payable/receivable


2,648





(836
)




1,812Other





(199
)

(515
)




(714
)Net cash provided by (used in) operating activities


(47,587
)

60,378


2,712





15,503Cash flows from investing activities:Intercompany receivable/payable, net


59,087








(59,087
)

Purchases of property, plant and equipment


(436
)

(2,357
)

(614
)




(3,407
)Net cash (used in) provided by investing activities


58,651


(2,357
)

(614
)

(59,087
)

(3,407
)Cash flows from financing activities:Repayment of long-term debt


(2,028
)

(15
)







(2,043
)Settlement of amount due to Panolam Holding Co.


(2,482
)










(2,482
)Borrowings under revolving credit facility


25,928











25,928Intercompany receivable/payable, net





(56,546
)

(2,541
)

59,087


Net cash provided by (used in) financing activities


21,418


(56,561
)

(2,541
)

59,087


21,403Effect of exchange rate changes on cash








(791
)




(791
)Net change in cash and cash equivalents


32,482


1,460


(1,234
)




32,708Cash and cash equivalentsbeginning of period


9,202


(2,553
)

4,095





10,744Cash and cash equivalentsend of period

$
41,684

$
(1,093
)
$
2,861

$


$
43,452


F-38

---



Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (Continued)

Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Statements of Cash Flows
Year Ended December 31, 2007Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalCash flows from operating activities:Net income

$
8,324

$
60,529

$
5,800

$
(66,329
)
$
8,324Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


2,896


17,846


9,488





30,230Deferred income tax benefit


7,222





(7,714
)




(492
)Amortization of debt acquisition costs


2,341











2,341Stock option expense


483











483Equity in net income of subsidiaries


(66,329
)







66,329


Other


857


(1,059
)

200





(2
)Changes in operating assets and liabilities:Accounts receivable


(14
)

3,387


(282
)




3,091Inventories





(673
)

(1,092
)




(1,765
)Other current assets


298


(1,387
)

180





(909
)Accounts payable and accrued liabilities


(2,582
)

(6,388
)

1,859





(7,111
)Income taxes payable/receivable


(5,887
)

410


466





(5,011
)Other





(341
)

(753
)




(1,094
)Net cash (used in) provided by operating activities


(52,391
)

72,324


8,152





28,085Cash flows from investing activities:Intercompany receivable/payable, net


73,606








(73,606
)

Purchases of property, plant and equipment


(182
)

(7,959
)

(697
)




(8,838
)Net cash provided by (used in) investing activities


73,424


(7,959
)

(697
)

(73,606
)

(8,838
)Cash flows from financing activities:Repayment of long-term debt


(20,000
)










(20,000
)Proceeds from long-term debt


30


(27
)







3Proceeds from revolving credit














Payment of debt acquisition costs


(405
)










(405
)Intercompany receivable/payable, net





(63,341
)

(10,265
)

73,606


Repurchase and cancellation of common stock














Repayment of revolving credit














Net cash (used in) provided by financing activities


(20,375
)

(63,368
)

(10,265
)

73,606


(20,402
)Effect of exchange rate changes on cash








1,050





1,050Net change in cash and cash equivalents


658


997


(1,760
)




(105
)Cash and cash equivalentsbeginning of period


8,544


(3,550
)

5,855





10,849Cash and cash equivalentsend of period

$
9,202

$
(2,553
)
$
4,095

$


$
10,744


F-39

---



Table of Contents

PANOLAM INDUSTRIES INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands, except share data)

18. SUPPLEMENTAL CONSOLIDATING CONDENSED FINANCIAL STATEMENTS (Continued)

Panolam Industries International, Inc. and Subsidiaries
Consolidating Condensed Statements of Cash Flows
Year Ended December 31, 2006Parent
Company

Subsidiary
Guarantors

Non-
Guarantor
Company

Eliminations

TotalCash flows from operating activities:Net income

$
10,893

$
62,302

$
12,670

$
(74,972
)
$
10,893Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


2,944


15,024


7,440





25,408Deferred income tax benefit


(3,871
)

(273
)

(999
)




(5,143
)Amortization of debt acquisition costs


3,247











3,247Stock option expense


487











487Equity in net income of subsidiaries


(74,972
)







74,972


Other


(204
)

458


(73
)




181Changes in operating assets and liabilities:Accounts receivable


204


11,747


1,312





13,263Inventories





5,194


318





5,512Other current assets


(3,044
)

1,251


(58
)




(1,851
)Accounts payable and accrued liabilities


2,801


(14,236
)

(1,716
)




(13,151
)Income taxes payable/receivable


2,049


455


1,760





4,264Other


391


(219
)

(974
)




(802
)Net cash (used in) provided by operating activities


(59,075
)

81,703


19,680





42,308Cash flows from investing activities:Acquisition, net of acquired cash


(77,801
)










(77,801
)Intercompany receivable/payable, net


83,398








(83,398
)

Purchases of property, plant and equipment


(236
)

(11,508
)

(875
)




(12,619
)Net cash provided by (used in) investing activities


5,361


(11,508
)

(875
)

(83,398
)

(90,420
)Cash flows from financing activities:Repayment of long-term debt


(25,077
)

(12
)

(9
)




(25,098
)Proceeds from long-term debt


80,000











80,000Proceeds from revolving credit


5,000











5,000Payment of debt acquisition costs


(2,764
)










(2,764
)Intercompany receivable/payable, net





(69,757
)

(13,641
)

83,398


Repurchase and cancellation of common stock


(50
)










(50
)Repayment of revolving credit


(5,000
)










(5,000
)Net cash provided by (used in) financing activities


52,109


(69,769
)

(13,650
)

83,398


52,088Net change in cash and cash equivalents


(1,605
)

426


5,155





3,976Cash and cash equivalentsbeginning of period


10,149


(3,976
)

700





6,873Cash and cash equivalentsend of period

$
8,544

$
(3,550
)
$
5,855

$


$
10,849


*        *        *        *        *

F-40

---