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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended February 29, 2008

OR



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

For the transition period from  to

Commission file number 001-33633





Zep Inc.

(Exact name of registrant
as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 26-0783366                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                  |  |           
|------------------------------------------------- |  | ----------
|1310 Seaboard Industrial Avenue, Atlanta, Georgia |  | 30318-2825
|(Address of principal executive offices)          |  | (Zip Code)

(404) 352-1680

(Registrants telephone number, including area code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)





Indicate by check mark x 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.    Yes  x    No   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ̈    Accelerated filer   ̈    Non-accelerated filer  x    Smaller Reporting Company   ̈

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

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest practicable date.

Common Stock$0.01 Par Value  20,906,548
shares as of April 10, 2008.









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##### Table of Contents

Zep Inc.

INDEX



|                              |  |                                                                                                                                                                               |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                                                               |  | Page No.
|PART I. FINANCIAL INFORMATION |  | 3                                                                                                                                                                            
|                              |  |                                                                                                                                                                              
|ITEM 1.                       |  | CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS                                                                                                                                |  | 3       
|                              |  |                                                                                                                                                                              
|                              |  | CONSOLIDATED AND COMBINED BALANCE SHEETS  FEBRUARY 29, 2008 (Unaudited) AND AUGUST 31, 2007                                                                                  |  | 3       
|                              |  |                                                                                                                                                                              
|                              |  | CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (Unaudited)  THREE AND SIX MONTHS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007                                               |  | 4       
|                              |  |                                                                                                                                                                              
|                              |  | CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Unaudited)  THREE AND SIX MONTHS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2007                                           |  | 5       
|                              |  |                                                                                                                                                                              
|                              |  | CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME  FOR THE YEAR ENDED AUGUST 31, 2007 AND SIX MONTHS ENDED FEBRUARY 29, 2008 (Unaudited) |  | 6       
|                              |  |                                                                                                                                                                              
|                              |  | NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Unaudited)                                                                                                           |  | 7       
|                              |  |                                                                                                                                                                              
|ITEM 2.                       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                                         |  | 16      
|                              |  |                                                                                                                                                                              
|ITEM 3.                       |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                                                    |  | 27      
|                              |  |                                                                                                                                                                              
|ITEM 4.                       |  | CONTROLS AND PROCEDURES                                                                                                                                                       |  | 27      
|                              | 
|PART II. OTHER INFORMATION    |  | 29                                                                                                                                                                           
|                              |  |                                                                                                                                                                              
|ITEM 1.                       |  | LEGAL PROCEEDINGS                                                                                                                                                             |  | 29      
|                              |  |                                                                                                                                                                              
|ITEM 1a.                      |  | RISK FACTORS                                                                                                                                                                  |  | 29      
|                              |  |                                                                                                                                                                              
|ITEM 6.                       |  | EXHIBITS                                                                                                                                                                      |  | 29      
|                              | 
|SIGNATURES                    |  | 30                                                                                                                                                                           



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Zep Inc.

CONSOLIDATED AND COMBINED BALANCE SHEETS

(In thousands, except share and per-share data)



|                                                                                                                     |  |                  |         |                |   |        
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | -------------- | - | -------
|                                                                                                                     |  | FEBRUARY 29,2008 |         | AUGUST 31,2007
|                                                                                                                     |  | (unaudited)      |         |               
|ASSETS                                                                                                               |  |                  |         |                |   |        
|Current Assets:                                                                                                      |  |                  |         |                |   |        
|Cash and cash equivalents                                                                                            |  | $                | 9,059   |                | $ | 9,142  
|Accounts receivable, less reserve for doubtful accounts of $3,689 at February 29, 2008 and $3,503 at August 31, 2007 |  |                  | 86,969  |                |   | 93,102 
|Inventories                                                                                                          |  |                  | 49,257  |                |   | 45,534 
|Deferred income taxes                                                                                                |  |                  | 7,765   |                |   | 6,283  
|Prepayments and other current assets                                                                                 |  |                  | 13,491  |                |   | 4,902  
|                                                                                                                     |  |                  |         |                |   |        
|Total Current Assets                                                                                                 |  |                  | 166,541 |                |   | 158,963
|                                                                                                                     |  |                  |         |                |   |        
|Property, Plant, and Equipment, at cost:                                                                             |  |                  |         |                |   |        
|Land                                                                                                                 |  |                  | 3,305   |                |   | 3,276  
|Buildings and leasehold improvements                                                                                 |  |                  | 51,978  |                |   | 51,293 
|Machinery and equipment                                                                                              |  |                  | 81,444  |                |   | 78,329 
|                                                                                                                     |  |                  |         |                |   |        
|Total Property, Plant, and Equipment                                                                                 |  |                  | 136,727 |                |   | 132,898
|Less - Accumulated depreciation and amortization                                                                     |  |                  | 84,441  |                |   | 81,215 
|                                                                                                                     |  |                  |         |                |   |        
|Property, Plant, and Equipment, net                                                                                  |  |                  | 52,286  |                |   | 51,683 
|                                                                                                                     |  |                  |         |                |   |        
|Other Assets:                                                                                                        |  |                  |         |                |   |        
|Goodwill                                                                                                             |  |                  | 32,400  |                |   | 31,864 
|Intangible assets                                                                                                    |  |                  | 104     |                |   | 118    
|Deferred income taxes                                                                                                |  |                  | 6,216   |                |   | 6,725  
|Other long-term assets                                                                                               |  |                  | 1,239   |                |   | 120    
|                                                                                                                     |  |                  |         |                |   |        
|Total Other Assets                                                                                                   |  |                  | 39,959  |                |   | 38,827 
|                                                                                                                     |  |                  |         |                |   |        
|Total Assets                                                                                                         |  | $                | 258,786 |                | $ | 249,473
|                                                                                                                     |  |                  |         |                |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                 |  |                  |         |                |   |        
|Current Liabilities:                                                                                                 |  |                  |         |                |   |        
|Current maturities of long-term debt                                                                                 |  | $                | 9,993   |                | $ | 296    
|Short-term debt                                                                                                      |  |                  | 4,100   |                |   |       
|Accounts payable                                                                                                     |  |                  | 34,383  |                |   | 37,279 
|Accrued compensation                                                                                                 |  |                  | 15,233  |                |   | 17,830 
|Other accrued liabilities                                                                                            |  |                  | 21,619  |                |   | 31,744 
|                                                                                                                     |  |                  |         |                |   |        
|Total Current Liabilities                                                                                            |  |                  | 85,328  |                |   | 87,149 
|Long-Term Debt, less current maturities                                                                              |  |                  | 59,650  |                |   | 74,704 
|                                                                                                                     |  |                  |         |                |   |        
|Deferred Income Taxes                                                                                                |  |                  | 343     |                |   | 413    
|                                                                                                                     |  |                  |         |                |   |        
|Self-Insurance Reserves, less current portion                                                                        |  |                  | 9,241   |                |   | 7,747  
|                                                                                                                     |  |                  |         |                |   |        
|Other Long-Term Liabilities                                                                                          |  |                  | 10,744  |                |   | 4,626  
|                                                                                                                     |  |                  |         |                |   |        
|Commitments and Contingencies (see Note 5)                                                                           |  |                  |         |                |   |        
|Stockholders Equity:                                                                                                |  |                  |         |                |   |        
|Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued and outstanding                          |  |                  |        |                |   |       
|Common stock, $0.01 par value; 500,000,000 shares authorized; 20,903,416 issued and outstanding at February 29, 2008 |  |                  | 209     |                |   |       
|Acuity Brands, Inc. investment                                                                                       |  |                  |        |                |   | 61,518 
|Paid-in capital                                                                                                      |  |                  | 72,517  |                |   |       
|Retained earnings                                                                                                    |  |                  | 2,887   |                |   |       
|Accumulated other comprehensive income items                                                                         |  |                  | 17,867  |                |   | 13,316 
|                                                                                                                     |  |                  |         |                |   |        
|Total Stockholders Equity                                                                                           |  |                  | 93,480  |                |   | 74,834 
|                                                                                                                     |  |                  |         |                |   |        
|Total Liabilities and Stockholders Equity                                                                           |  | $                | 258,786 |                | $ | 249,473
|                                                                                                                     |  |                  |         |                |   |        

The accompanying Notes to Consolidated and Combined Financial Statementsare an integral part
of these statements.



3



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Zep Inc.

CONSOLIDATED AND COMBINED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per-share data)



|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|----------------------------------------------------- |  | ------------------------------------ | ------- | ---------------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                                      |  | THREE MONTHS ENDEDFEBRUARY 29 and 28 |         | SIX MONTHS ENDEDFEBRUARY 29 and 28
|                                                      |  | 2008                                 |         | 2007                               |   | 2008    |  | 2007
|Net Sales                                             |  | $                                    | 133,163 |                                    | $ | 131,050 |  | $    | 276,739 |  | $ | 267,921
|Cost of Products Sold                                 |  |                                      | 58,781  |                                    |   | 56,539  |  |      | 118,924 |  |   | 114,772
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Gross Profit                                          |  |                                      | 74,382  |                                    |   | 74,511  |  |      | 157,815 |  |   | 153,149
|Selling, Distribution, and Administrative Expenses    |  |                                      | 69,775  |                                    |   | 70,676  |  |      | 142,446 |  |   | 143,979
|Restructuring Charge                                  |  |                                      | 753     |                                    |   |        |  |      | 753     |  |   |       
|Loss on Sale of Fixed Assets                          |  |                                      |        |                                    |   | 30      |  |      |        |  |   | 192    
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Operating Profit                                      |  |                                      | 3,854   |                                    |   | 3,805   |  |      | 14,616  |  |   | 8,978  
|Other Expense:                                        |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Interest expense, net                                 |  |                                      | 820     |                                    |   | 1,202   |  |      | 1,880   |  |   | 2,393  
|Miscellaneous expense, net                            |  |                                      | 84      |                                    |   | 25      |  |      | 3       |  |   | 101    
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Total Other Expense                                   |  |                                      | 904     |                                    |   | 1,227   |  |      | 1,883   |  |   | 2,494  
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Income before Provision for Income Taxes              |  |                                      | 2,950   |                                    |   | 2,578   |  |      | 12,733  |  |   | 6,484  
|Provision for Income Taxes                            |  |                                      | 1,043   |                                    |   | 1,668   |  |      | 4,546   |  |   | 3,142  
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Net Income                                            |  | $                                    | 1,907   |                                    | $ | 910     |  | $    | 8,187   |  | $ | 3,342  
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Earnings Per Share:                                   |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Basic Earnings per Share                              |  | $                                    | 0.09    |                                    | $ | 0.04    |  | $    | 0.39    |  | $ | 0.16   
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Basic Weighted Average Number of Shares Outstanding   |  |                                      | 20,845  |                                    |   | 20,811  |  |      | 20,831  |  |   | 20,811 
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Diluted Earnings per Share                            |  | $                                    | 0.09    |                                    | $ | 0.04    |  | $    | 0.39    |  | $ | 0.16   
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Diluted Weighted Average Number of Shares Outstanding |  |                                      | 21,270  |                                    |   | 20,811  |  |      | 21,112  |  |   | 20,811 
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        
|Dividends Declared per Share                          |  | $                                    | 0.04    |                                    | $ |        |  | $    | 0.04    |  | $ |       
|                                                      |  |                                      |         |                                    |   |         |  |      |         |  |   |        

The accompanying Notes to Consolidated and Combined Financial Statements are an integral
part of these statements.



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Zep Inc.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)



|                                                                                             |  |                                    |         |   |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                             |  | SIX MONTHS ENDEDFEBRUARY 29 and 28 |        
|                                                                                             |  | 2008                               |         |   | 2007 |  
|Cash Provided by (Used for) Operating Activities:                                            |  |                                    |         |   |      |   |        |  
|Net income                                                                                   |  | $                                  | 8,187   |   |      | $ | 3,342  |  
|Adjustments to reconcile net income to net cash provided by (used for) operating activities: |  |                                    |         |   |      |   |        |  
|Depreciation and amortization                                                                |  |                                    | 3,300   |   |      |   | 3,992  |  
|Loss on the sale or disposal of property, plant, and equipment                               |  |                                    |        |   |      |   | 192    |  
|Deferred income taxes                                                                        |  |                                    | (1,043  | ) |      |   | (1,161 | )
|Excess tax benefits from share-based payments                                                |  |                                    | (519    | ) |      |   |       |  
|Other non-cash charges                                                                       |  |                                    | 538     |   |      |   | 713    |  
|Change in assets and liabilities -                                                           |  |                                    |         |   |      |   |        |  
|Accounts receivable                                                                          |  |                                    | 8,740   |   |      |   | 2,692  |  
|Inventories                                                                                  |  |                                    | (2,659  | ) |      |   | (3,966 | )
|Prepayments and other current assets                                                         |  |                                    | (8,309  | ) |      |   | (3,834 | )
|Accounts payable                                                                             |  |                                    | (3,502  | ) |      |   | (3,605 | )
|Accrued compensation and other current liabilities                                           |  |                                    | (7,478  | ) |      |   | (6,751 | )
|Self-insurance and other long-term liabilities                                               |  |                                    | 1,637   |   |      |   | 1,441  |  
|Other assets                                                                                 |  |                                    | (1,039  | ) |      |   | (1,768 | )
|                                                                                             |  |                                    |         |   |      |   |        |  
|Net Cash Used for Operating Activities                                                       |  |                                    | (2,147  | ) |      |   | (8,713 | )
|                                                                                             |  |                                    |         |   |      |   |        |  
|Cash Provided by (Used for) Investing Activities:                                            |  |                                    |         |   |      |   |        |  
|Purchases of property, plant, and equipment                                                  |  |                                    | (3,113  | ) |      |   | (2,534 | )
|Proceeds from sale of property, plant, and equipment                                         |  |                                    | 68      |   |      |   | 32     |  
|Sale of businesses                                                                           |  |                                    | 55      |   |      |   | 82     |  
|                                                                                             |  |                                    |         |   |      |   |        |  
|Net Cash Used for Investing Activities                                                       |  |                                    | (2,990  | ) |      |   | (2,420 | )
|                                                                                             |  |                                    |         |   |      |   |        |  
|Cash Provided by (Used for) Financing Activities:                                            |  |                                    |         |   |      |   |        |  
|Proceeds from revolving credit facility                                                      |  |                                    | 77,100  |   |      |   |       |  
|Payment to Acuity Brands, Inc. upon separation                                               |  |                                    | (62,500 | ) |      |   |       |  
|Repayments of borrowings from revolving credit facility                                      |  |                                    | (15,531 | ) |      |   |       |  
|Proceeds from issuances of other long-term debt                                              |  |                                    |        |   |      |   | 273    |  
|Employee stock purchase plan issuances                                                       |  |                                    | 57      |   |      |   |       |  
|Excess tax benefit from share-based payments                                                 |  |                                    | 519     |   |      |   |       |  
|Dividends                                                                                    |  |                                    | (838    | ) |      |   |       |  
|Repayments of other long-term debt                                                           |  |                                    | (326    | ) |      |   | (273   | )
|Net activity with Acuity Brands, Inc. prior to separation                                    |  |                                    | 5,683   |   |      |   | 5,587  |  
|                                                                                             |  |                                    |         |   |      |   |        |  
|Net Cash Provided by Financing Activities                                                    |  |                                    | 4,164   |   |      |   | 5,587  |  
|                                                                                             |  |                                    |         |   |      |   |        |  
|Effect of Exchange Rate Changes on Cash                                                      |  |                                    | 890     |   |      |   | (378   | )
|                                                                                             |  |                                    |         |   |      |   |        |  
|Net Change in Cash and Cash Equivalents                                                      |  |                                    | (83     | ) |      |   | (5,924 | )
|Cash and Cash Equivalents at Beginning of Period                                             |  |                                    | 9,142   |   |      |   | 8,128  |  
|                                                                                             |  |                                    |         |   |      |   |        |  
|Cash and Cash Equivalents at End of Period                                                   |  | $                                  | 9,059   |   |      | $ | 2,204  |  
|                                                                                             |  |                                    |         |   |      |   |        |  

The accompanyingNotes to Consolidated and Combined Financial Statementsare an integral
part of these statements.



5



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##### Table of Contents

Zep Inc.

CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS EQUITY AND

COMPREHENSIVE INCOME

(In
thousands)



|                                                                                                                                 |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | -------------- | - | ------- | ------ |  | ------ |  | -------------- | --- | ---------------- | - | ------ | ------------------------------------ | - | ------------ | - |  | - | ------ |  | - | ------ | -
|                                                                                                                                 |  | ComprehensiveIncome |        | ParentsEquity |   |         | Shares |  | Amount |  | Paid-inCapital |     | RetainedEarnings |   |        | Accumulated OtherComprehensiveIncome |   | Total Equity |  
|Balance at August 31, 2007                                                                                                       |  |                     |        |                | $ | 61,518  |        |  |       |  |                |    |                  |   |       |                                      |   |             |   |  | $ | 13,316 |  | $ | 74,834 |  
|                                                                                                                                 |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  
|Comprehensive Income:                                                                                                            |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  
|                                                                                                                                 |  |                     |        |                |   |         |        | 
|Net income earned prior to October 31, 2007 spin-off                                                                             |  | $                   | 4,462  |                |   | 4,462   |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   | 4,462  |  
|Net income earned subsequent to October 31, 2007                                                                                 |  |                     | 3,725  |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   | 3,725        |   |  |   |        |  |   | 3,725  |  
|Foreign currency translation adjustment                                                                                          |  |                     | 4,551  |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   | 4,551  |  |   | 4,551  |  
|                                                                                                                                 |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  
|Comprehensive Income:                                                                                                            |  | $                   | 12,738 |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  
|                                                                                                                                 |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  
|Net transaction with Acuity Brands, Inc.                                                                                         |  |                     |        |                |   | 5,683   |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   | 5,683  |  
|Consummation of spin-off transaction on October 31, 2007, including distribution of Zep Inc. common stock by Acuity Brands,
Inc. |  |                     |        |                |   | (71,663 | )      |  | 20,816 |  |                | 208 |                  |   | 71,455 |                                      |   |              |   |  |   |        |  |   |       |  
|Amortization, issuance, and forfeitures of restricted stock grants and stock options                                             |  |                     |        |                |   |         |        |  | 83     |  |                | 1   |                  |   | 254    |                                      |   |              |   |  |   |        |  |   | 255    |  
|Employee stock purchase plan                                                                                                     |  |                     |        |                |   |         |        |  | 4      |  |                |    |                  |   | 57     |                                      |   |              |   |  |   |        |  |   | 57     |  
|Tax effect on restricted stock grants and stock options                                                                          |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   | 519    |                                      |   |              |   |  |   |        |  |   | 519    |  
|Deferred compensation program                                                                                                    |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   | 232    |                                      |   |              |   |  |   |        |  |   | 232    |  
|Dividend payments                                                                                                                |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   | (838         | ) |  |   |        |  |   | (838   | )
|                                                                                                                                 |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  
|Balance at February 29, 2008 (unaudited)                                                                                         |  |                     |        |                | $ |        |        |  | 20,903 |  | $              | 209 |                  | $ | 72,517 |                                      | $ | 2,887        |   |  | $ | 17,867 |  | $ | 93,480 |  
|                                                                                                                                 |  |                     |        |                |   |         |        |  |        |  |                |     |                  |   |        |                                      |   |              |   |  |   |        |  |   |        |  

The accompanying Notes to Consolidated and Combined Financial Statements are an integral
part of these statements.



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Zep Inc.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (Unaudited)

(Amounts in thousands, except share and per-share data and as indicated)

1. DESCRIPTION OF BUSINESS, DISTRIBUTION, AND BASIS OF PRESENTATION

Description of the
Business and Distribution

Zep Inc. (Zep or the Company) is a producer, marketer, and service provider of a
wide range of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer end-markets. Zeps product portfolio includes anti-bacterial and industrial hand care products, cleaners, degreasers, deodorizers,
disinfectants, floor care, sanitizers, and pest and weed control products. As of February 29, 2008, utilizing a base of more than 2,300 unique formulations, Zep sells over 11,500 products through its salaried and commissioned direct sales
force, operates six plants, and serves approximately 325,000 customers through a network of distribution centers and warehouses.

The
spin-off of Zep by Acuity Brands, Inc. (Acuity Brands) became effective on October 31, 2007 through a distribution of 100% of the common stock of Zep to Acuity Brands stockholders (the Distribution). The stock
dividend of one share of Zep common stock for every two shares of Acuity Brands common stock was distributed on a pro rata basis to holders of record of Acuity Brands common stock at the close of business on October 17, 2007, which was the
record date for the Distribution. No fractional shares of Zep common stock were distributed. Instead of fractional shares, Zep stockholders received cash. Following the Distribution, Acuity Brands does not own any shares of Zep as the spin-off
rendered Zep an independent public company. In conjunction with the separation of their businesses, Zep and Acuity Brands entered into various agreements that address the allocation of assets and liabilities between them and that define their
relationship after the separation, including the Agreement of Plan of Distribution, which we refer to as the distribution agreement, the tax disaffiliation agreement, the employee benefits agreement, and the transition services agreement. The
Internal Revenue Service has issued a private letter ruling supporting the spin-offs tax-free status, and Zep continues to conduct its operations in a manner that is compliant with the conditions set forth by that ruling. Zep and Acuity Brands
have also received an opinion from their external counsel supporting the spin-offs tax-free status. The stock of Zep is listed on the New York Stock Exchange under the ticker symbol ZEP.

Basis of Presentation

The
financial statements for the periods presented prior to the Distribution date of October 31, 2007 are presented on a combined basis and represent those entities that were ultimately transferred to us as part of the spin-off. Prior to the
spin-off, certain functions, including treasury, tax, executive and employee benefits, financial reporting, risk management, legal, corporate secretary and investor relations, were historically managed by the corporate division of Acuity Brands on
behalf of its subsidiaries. The assets, liabilities and expenses related to the support of these centralized corporate functions have been allocated to us on a specific identification basis to the extent possible. Otherwise, allocations related to
these services were primarily based upon an estimate of the proportion of corporate amounts applicable to us given our contribution to our consolidated parent companys revenues and employee base. Allocation ratios derived from these
contribution factors are similar in amount and remained consistent throughout the historical periods presented. Examples of expenses that were allocated in accordance with these proportional estimates include charges related to accounting and legal
services undertaken to ensure the consolidated parent companys compliance with various regulatory requirements as well as the salaries of certain corporate officers and employees. In the opinion of management, the assumptions and allocations
have been made on a reasonable and appropriate basis under the circumstances. Management believes that amounts allocated to Zep reflect a reasonable representation of the types of costs that would have been incurred if we had performed these
functions as a stand-alone company. However, as estimation is inherent within the aforementioned allocation process, these combined financial statements do not include all of the actual amounts that would have been incurred had we been a stand-alone
entity during the periods presented. The financial statements in this Form 10-Q for periods ending on or after the Distribution date of October 31, 2007 are presented on a consolidated basis and include the accounts of Zep and its
majority-owned subsidiaries.

The unaudited interim Consolidated and Combined Financial Statements included herein have been
prepared by us in accordance with U.S. generally accepted accounting principles and present our financial position, results of operations, and cash flows. These consolidated and combined financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, necessary to present fairly the consolidated and combined results for the interim periods presented. Certain information and footnote disclosures normally included in our annual financial
statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. However, we believe that the disclosures included herein are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with our audited combined financial statements as of and for the three years ended August 31, 2007 and notes thereto included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on November 29, 2007 (File No. 001- 33633).



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The results of operations for the three and six months ended February 29, 2008 are not necessarily
indicative of the results to be expected for the full fiscal year because our net sales and net income are generally higher in the second half of our fiscal year, and because of the continued uncertainty of general economic conditions impacting the
key end markets in which we participate.

2. NEW ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in Fiscal 2008

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement implications of tax positions taken or expected to be taken in a
companys tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure of such positions. We adopted FIN 48 effective September 1, 2007, and
detail regarding the impact of this pronouncements adoption is located at Note 9 of the Notes to Consolidated and Combined Financial Statements.

Accounting Standards Yet to be Adopted

In December 2007, the FASB issued Statement of
Financial Accounting Standard (SFAS) No. 141(revised 2007), Business Combinations (SFAS No.141(R)). SFAS No. 141(R) replaces SFAS No. 141 and requires that all assets, liabilities, contingent
consideration, contingencies and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; that acquisition costs generally be expensed as incurred; that restructuring costs generally be
expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS No. 141(R) is
effective for business combinations transacted subsequent to a companys first annual reporting period beginning after December 15, 2008, and is therefore effective for us beginning in fiscal year 2010. The impact that SFAS No. 141(R)
might have our results of operation and financial position will depend upon the nature, terms and size of any acquisitions that we may consummate after the effective date.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a
single authoritative definition of fair value, establishes a framework for measuring fair value, and expands disclosure requirements pertaining to fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal years, and is therefore effective for us beginning in fiscal year 2009. We are currently evaluating the impact that this guidance will have on our results of
operations and financial position.

3. INVENTORIES

Inventories include materials, direct labor, and related manufacturing overhead. Inventories are stated at the lower of cost (on a first-in, first-out or average cost basis) or market and consist of the following:



|                           |  |                  |        |   |                |   |        |  
|-------------------------- |  | ---------------- | ------ | - | -------------- | - | ------ | -
|                           |  | February 29,2008 |        |   | August 31,2007 |  
|Raw materials and supplies |  | $                | 13,802 |   |                | $ | 13,277 |  
|Work in process            |  |                  | 293    |   |                |   | 178    |  
|Finished goods             |  |                  | 37,147 |   |                |   | 33,831 |  
|                           |  |                  |        |   |                |   |        |  
|                           |  |                  | 51,242 |   |                |   | 47,286 |  
|Less: Reserves             |  |                  | (1,985 | ) |                |   | (1,752 | )
|                           |  |                  |        |   |                |   |        |  
|                           |  | $                | 49,257 |   |                | $ | 45,534 |  
|                           |  |                  |        |   |                |   |        |  



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4. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Borrowings Preceding the Spin-Off

The debt levels and associated interest costs reflected
within the historical combined financial statements prior to the Distribution date of October 31, 2007 (the Distribution Date) reflect assumptions regarding prospective debt issuances based upon our anticipated financial condition
on or about the time of the spin-off. Debt in the amount of $75.0 million was assumed to have been outstanding during all periods preceding the Distribution Date. Accordingly, Zep has reflected the interest expense associated with these borrowings
within our historical results of operations as though $75.0 million in total borrowings had been outstanding during all periods presented therein.

Borrowings Following the Spin-Off

On October 19, 2007, we executed a revolving credit facility and a
receivables facility in anticipation of the spin-off, and the significant terms of each of those facilities are discussed below. We drew $62.5 million from that revolving credit facility on October 31, 2007, and these proceeds were immediately
distributed to Acuity Brands. Additionally, we assumed a $7.2 million industrial revenue bond due in 2018 as well as approximately $0.3 million of other debt following the spin-off. Further detail regarding each of these debt instruments including
amounts outstanding under each as of February 29, 2008 is provided below.

Revolving Credit Facility

On October 19, 2007, we entered into a $100 million unsecured revolving credit facility (Revolving Credit Facility) with a syndicate of
commercial banks. The Revolving Credit Facility contains customary covenants regarding the preservation and maintenance of our corporate existence, material compliance with laws, payment of taxes, and maintenance of insurance and of our properties.
Further, the Revolving Credit Facility contains financial covenants including a leverage ratio (Maximum Leverage Ratio) of total indebtedness to EBITDA (earnings before interest, taxes, depreciation and amortization expense), as such
terms are defined in the Revolving Credit Facility agreement, and a minimum interest coverage ratio (Minimum Interest Coverage Ratio). These ratios are computed at the end of each fiscal quarter for the most recent 12-month period. The
Revolving Credit Facility allows for a Maximum Leverage Ratio of 3.25x and a Minimum Interest Coverage Ratio of 2.50x. The Revolving Credit Facility includes customary events of default, including, but not limited to, the failure to pay any
interest, principal or fees when due, the failure to perform any covenant or agreement, inaccurate or false representations or warranties, a material adverse change, insolvency or bankruptcy, change of control, the occurrence of certain ERISA
events, and judgment defaults. We were in compliance with all related financial covenants at February 29, 2008.

Generally, amounts
outstanding under the Revolving Credit Facility bear interest at a base rate or a Eurocurrency Rate. Base rate advances are denominated in U.S. Dollars, and amounts outstanding bear interest at a fluctuating rate equal to
JPMorgans base rate. Eurocurrency rate advances can be denominated in a variety of currencies, including U.S. Dollars, and amounts outstanding bear interest at a periodic fixed rate equal to LIBOR for the applicable currency plus an applicable
margin. The applicable margins are based on our leverage ratio, as defined in the Revolving Credit Facility, with such margins ranging from 0.50% to 1.00%. Interest on both base rate and Eurocurrency rate advances are payable upon the earlier of
maturity of the outstanding loan or quarterly if the loan is for a period greater than three months. The Revolving Credit Facility will mature and all amounts outstanding thereunder will be due and payable on October 19, 2012.

As of February 29, 2008, borrowings under the Revolving Credit Facility totaled $66.6 million. Of that total outstanding amount, $4.1 million has
been classified as Short-term debt on our Consolidated and Combined Balance Sheets in accordance with the maturity date associated with those borrowings. Our Consolidated and Combined Balance Sheets include approximately $10.0
million of borrowings made under this agreement that have been classified as Current maturities of long-term debt reflecting our intention to settle that amount during fiscal year 2008. The remaining $52.5 million has been reported within
Long-term debt, less current maturities. The base interest rate associated with borrowings made under the Revolving Credit Facility subsequent to the spin-off approximated 4.3%. As of February 29, 2008, we had additional borrowing
capacity under the Revolving Credit Facility of $31.1 million, which represents the full amount of the Revolving Credit Facility less the aforementioned borrowings as well as the outstanding letters of credit of $2.3 million that were issued under
the Revolving Credit Facility and are discussed below.



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Receivables Facility

On October 19, 2007, we entered into a Credit and Security Agreement (Receivables Facility) that allows us to borrow, on an ongoing
basis, up to $40 million secured by undivided interests in a defined pool of trade accounts receivable of the Company. Interest rates under the Receivables Facility vary with asset-backed commercial paper rates plus an applicable margin of 0.325%.
Net trade accounts receivable pledged as security for borrowings under the Receivables Facility totaled $32.9 million at February 29, 2008, and there were no outstanding borrowings under the Receivables Facility as of that date. The Receivables
Facility contains customary reporting and compliance covenants as well as a cross-default provision whereby we would be in default should an occurrence of a default or an event of a default result under any other financing arrangement where we are a
debtor or an obligor to debt in excess of $25 million. We were in compliance with all related financial covenants at February 29, 2008.

Industrial Revenue Bonds

The industrial revenue bonds due 2018 were issued by the City of DeSoto Industrial
Development Authority, Inc. in May 1991 in connection with the construction of Zeps facility in that city. We are required to make principal and interest payments on the bonds. We will fulfill these requirements by making interest payments on
a quarterly basis, and by settling the associated principal obligation in 2018 upon maturity. The payment of principal and interest on the bonds is secured by an irrevocable letter of credit issued by Wachovia Bank, National Association. The bonds
currently bear interest at a weekly rate. The interest rate during the six months ended February 29, 2008 and February 28, 2007 averaged 3.2% and 3.6%, respectively. Pursuant to certain cross-default provisions relating to our industrial
revenue bonds, a breach of financial covenants set forth in our Revolving Credit Facility Agreement constituting an event of default under the Revolving Credit Facility Agreement would also constitute an event of default under our industrial revenue
bonds.

Letters of Credit

Subsequent to August 31, 2007 and in connection with the spin-off, we issued outstanding letters of credit totaling $9.8 million primarily for the purpose of securing collateral requirements under our casualty
insurance programs and for providing credit support for our industrial revenue bonds. At February 29, 2008, a total of $2.3 million of the letters of credit were issued under the Revolving Credit Facility, thereby reducing the total
availability under the facility by such amount.

Interest expense, net

Interest expense, net, is composed primarily of interest expense on long-term debt, revolving credit facility borrowings, and short-term
borrowings, partially offset by interest income on cash and cash equivalents. As discussed above, outstanding debt in the amount of $75.0 million has been assumed to have been outstanding in all periods preceding the Distribution Date.
Accordingly, we have reflected interest expense associated with these assumed borrowings within the Consolidated and Combined Statements of Income as though the $75.0 million in total borrowings had been outstanding during all periods
preceding the Distribution Date. Net interest expense subsequent to the Distribution Date has been calculated in accordance with actual borrowings.

The following table summarizes the components of interest expense, net:



|                      |  |                                      |     |   |                                    |   |       |      |  |   |       |   |  |   |       |  
|--------------------- |  | ------------------------------------ | --- | - | ---------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                      |  | Three Months EndedFebruary 29 and 28 |     |   | Six Months EndedFebruary 29 and 28 |  
|                      |  | 2008                                 |     |   | 2007                               |   |       | 2008 |  |   | 2007  |  
|Interest expense      |  | $                                    | 833 |   |                                    | $ | 1,254 |      |  | $ | 1,908 |   |  | $ | 2,509 |  
|Interest income       |  |                                      | (13 | ) |                                    |   | (52   | )    |  |   | (28   | ) |  |   | (116  | )
|                      |  |                                      |     |   |                                    |   |       |      |  |   |       |   |  |   |       |  
|Interest expense, net |  | $                                    | 820 |   |                                    | $ | 1,202 |      |  | $ | 1,880 |   |  | $ | 2,393 |  
|                      |  |                                      |     |   |                                    |   |       |      |  |   |       |   |  |   |       |  



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5. COMMITMENTS AND CONTINGENCIES

Litigation

We are subject to various legal claims arising in the normal course of business.
We, as part of programs entered into by Acuity Brands, are self-insured up to specified limits for certain types of claims, including product liability, and we are fully self-insured for certain other types of claims, including environmental,
product recall, and patent infringement as part of the distribution agreement with Acuity Brands. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will
not have a material adverse effect on the results of operations, financial position, or cash flows of Zep. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could
have a material adverse effect on our future results of operations, financial position, or cash flows. Zep establishes reserves for legal claims when the costs associated with the claims become probable and can be reasonably estimated. The actual
costs of resolving legal claims may be substantially higher or lower than the amounts reserved for such claims. However, the Company cannot make a meaningful estimate of actual costs to be incurred that could possibly be higher or lower than the
amounts reserved.

Environmental Matters

Our operations are subject to federal, state, local, and foreign laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous wastes,
as well as to the remediation of contaminated sites. Permits and environmental controls are required for certain of our operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing
authorities. We will incur capital and operating costs relating to environmental compliance on an ongoing basis. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be
substantial. While we believe that we are currently in substantial compliance with all applicable environmental laws and regulations, there can be no assurance that we will not incur significant costs to remediate violations of such laws and
regulations, particularly in connection with acquisitions of existing operating facilities, or to comply with changes in, or stricter or different interpretations of, existing laws and regulations. Such costs could have a material adverse effect on
our results of operations.

In June 2007, we reached a final resolution of the investigation by the United States Department of Justice
(DOJ) of certain environmental issues at our primary manufacturing facility, located in Atlanta, Georgia. In connection with this resolution we are subject to a three-year probation period that incorporates a compliance agreement with the United
States Environmental Protection Agency (EPA). Under the compliance agreement, we will be required to maintain an enhanced compliance program. The resolution of this matter is not expected to lead to a material loss of business, any disruption of
production, or materially higher operating costs. However, in the event of our material breach of the compliance agreement, those consequences could occur.

We are currently a party to federal and state administrative proceedings arising under federal and state laws enacted for the protection of the environment where a state or federal agency or a private party alleges
that hazardous substances generated by Zep have been discharged into the environment and a state or federal agency is requiring a cleanup of soil and/or groundwater pursuant to federal or state superfund laws. In each of these proceedings in which
Zep has been named as a party that allegedly generated hazardous substances that were transported to a waste site owned and operated by another party, (1) Zep is one of many other identified generators who have reached an agreement on the
allocation of costs for cleanup among the various generators and Zeps potential liability is not material; or (2) Zep has been identified as a potential generator and the sites have been remediated by the EPA or by a state for a cost that
is not material; or (3) other generators have cleaned up the site and have not pursued a claim against Zep and Zeps liability, if any, would not be material.

With respect to the only active site involving property which we own and where we have been named as a potentially responsible partyour property on Seaboard Industrial Boulevard in Atlanta, Georgiawe and
the current and former owners of adjoining properties had reached agreement to share the expected costs and responsibilities of implementing an approved corrective action plan under the Georgia Hazardous Response Act (HSRA) to periodically monitor
property along a nearby stream for a period of five years ending in 2009. Subsequently, in connection with the DOJ investigation, we and the EPA each analyzed samples taken from certain sumps at the Seaboard facility. The sample results from some of
the sump tests indicated the presence of certain hazardous substances. As a result, we notified the Georgia Environmental Protection Division and are conducting additional soil and groundwater studies pursuant to HSRA.

Based on the results to date of the above-mentioned studies, we plan to conduct voluntary subsurface remediation of the site. Our current estimate is
that over approximately the next five years we will expend an amount that could range up to $7.5 million for the voluntary subsurface remediation, primarily to remove contaminants from soil underlying one of our manufacturing buildings, and in May
2007 we accrued a pretax liability of $5.0 million representing our best estimate of costs associated with remediation and other related environmental issues. Further sampling and engineering studies could cause us to revise the current estimate. We
believe that



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additional expenditures after five years of remediation may be necessary and that those expenditures could range up to an additional $10.0 million during the
subsequent twenty-five year period. It may be appropriate to capitalize certain of the expenditures that might be incurred in this twenty-five year period. We arrived at the current estimates on the basis of preliminary studies prepared by two,
independent third party environmental consulting firms. The actual cost of remediation will vary depending upon the results of additional testing and geological studies, the success of initial remediation efforts in the first five years addressing
the most significant areas of contamination, the rate at which site conditions may change, and the requirements of the Georgia Environmental Protection Division of the State of Georgia.

The U.S. Environmental Protection Agency (EPA) has issued a Notice of Violation (NOV) and document request regarding the use and management
of certain trench drains at the Seaboard production facility as well as assorted minor waste labeling issues. The Company has responded to the request, is in discussions with the EPA concerning the basis for the NOV as it relates to the trench
drains, and is cooperating with the agency to bring the matter to a conclusion.

Guarantees and Indemnities

As further discussed in Note 1 of the Notes to Consolidated and Combined Financial Statements, in conjunction with the separation of their
businesses, Zep and Acuity Brands entered into various agreements that address the allocation of assets and liabilities between them and that define their relationship after the separation, including the distribution agreement, the tax
disaffiliation agreement, the employee benefits agreement, and the transition services agreement. Included in these agreements are certain general indemnifications granted by Zep to Acuity Brands, and by Acuity Brands to Zep, as well as specific
limited tax liability indemnifications in the event that the Distribution is deemed to be taxable, or if any of the internal reorganization steps taken to effect the Distribution are not deemed to have been made on a tax-free basis. The Internal
Revenue Service has issued a private letter ruling supporting the spin-offs tax-free status, and Zep continues to conduct its operations in a manner that is compliant with the conditions set forth by that ruling. Further, Zep and Acuity Brands
have received an opinion from their external counsel supporting the spin-offs tax-free status. We believe the probability that the Distribution will be deemed taxable to be remote, and the estimated fair value to be de minimus. Therefore, we
have not recorded any related amounts in our Consolidated and Combined Financial Statements.

6. RESTRUCTURING CHARGES

During the first quarter of fiscal year 2008, Zeps management announced its intention to pursue a strategic plan focused upon achieving the
Companys long-term financial objectives. As part of this program, we recorded a pretax charge of $1.1 million during February 2008. This charge was primarily composed of severance related costs associated with the elimination of 23 salaried
positions. The Company is in the early stages of implementing its broader restructuring initiatives, and while the full extent of these initiatives is not yet known, we anticipate they will include reducing the complexity currently associated with
our product and customer portfolio, realignment of our manufacturing and distribution operations to better serve our customers, exiting certain leased properties, and further actions necessary to streamline the business. The ultimate cost of this
restructuring effort is also unknown, but we believe related expenses could approximate $8.0 million in this fiscal year.



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On February 22, 2005, Acuity Brands announced certain actions to accelerate its efforts to
streamline and improve the effectiveness of its operations. As part of this program, Zep recorded a pretax charge of $4.5 million during fiscal year 2005 to reflect the costs associated with the elimination of approximately 70 salaried positions
worldwide. This streamlining effort included facility consolidations and process improvement initiatives. At the close of the first fiscal quarter of 2008, Zeps restructuring reserve included approximately $0.4 million of the initial $4.5
million charge recorded in February 2005. During the second quarter of fiscal 2008, and as part of the overall strategic planning effort, Zeps management evaluated restructuring initiatives set forth by previous management teams. The Company
no longer intends to support those restructuring programs enacted prior to the spin-off, and, therefore, the remaining $0.4 million associated with those programs was reversed during the second quarter of fiscal 2008. The net pretax restructuring
charge recognized in the second quarter of fiscal 2008 totaled $0.8 million. The fiscal 2008 changes to the restructuring charge reserve (included within Accrued compensation on the Consolidated and Combined Balance Sheets) during the
six months ended February 29, 2008 are summarized as follows:



|                                                                     |  |   |       |  
|-------------------------------------------------------------------- |  | - | ----- | -
|Balance as of August 31, 2007                                        |  | $ | 812   |  
|Restructuring liabilities assumed by Acuity Brands upon Distribution |  |   | (455  | )
|Discontinuation of 2005 restructuring program                        |  |   | (357  | )
|Restructuring charge recorded during fiscal 2008                     |  |   | 1,110 |  
|Payments made from 2008 restructuring charge                         |  |   | (186  | )
|                                                                     |  |   |       |  
|Balance as of February 29, 2008                                      |  | $ | 924   |  
|                                                                     |  |   |       |  

7. EARNINGS PER SHARE

The Company computes earnings per share in accordance with SFAS No. 128, Earnings per Share. Under this statement, basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during the period. Unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share is computed similarly but reflects the potential
dilution that would occur if dilutive options were exercised and restricted stock awards were vested.

On October 31, 2007, the
separation from Acuity Brands was completed in a tax-free distribution to its stockholders of one share of our common stock for every two shares of Acuity Brands common stock held as of the record date. Prior to this date, all outstanding
shares of Zep were owned by Acuity Brands. Accordingly, for periods prior to October 31, 2007, basic and diluted earnings per share have been computed using the number of shares of Zep common stock outstanding on October 31, 2007, the date
on which the Zep common stock was distributed by Acuity Brands to its stockholders.

The following table calculates basic and diluted
earnings per common share for the three and six months ended February 29, 2008 and February 28, 2007:



|                                                              |  |                                      |        |                                    |   |        |  |      |        |  |   |       
|------------------------------------------------------------- |  | ------------------------------------ | ------ | ---------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                              |  | Three Months EndedFebruary 29 and 28 |        | Six Months EndedFebruary 29 and 28
|                                                              |  | 2008                                 |        | 2007                               |   | 2008   |  | 2007
|Basic earnings per share:                                     |  |                                      |        |                                    |   |        |  |      |        |  |   |       
|Net income                                                    |  | $                                    | 1,907  |                                    | $ | 910    |  | $    | 8,187  |  | $ | 3,342 
|Basic weighted average shares outstanding                     |  |                                      | 20,845 |                                    |   | 20,811 |  |      | 20,831 |  |   | 20,811
|                                                              |  |                                      |        |                                    |   |        |  |      |        |  |   |       
|Basic earnings per share                                      |  | $                                    | 0.09   |                                    | $ | 0.04   |  | $    | 0.39   |  | $ | 0.16  
|                                                              |  |                                      |        |                                    |   |        |  |      |        |  |   |       
|Diluted earnings per share:                                   |  |                                      |        |                                    |   |        |  |      |        |  |   |       
|Net income                                                    |  | $                                    | 1,907  |                                    | $ | 910    |  | $    | 8,187  |  | $ | 3,342 
|Basic weighted average shares outstanding                     |  |                                      | 20,845 |                                    |   | 20,811 |  |      | 20,831 |  |   | 20,811
|Common stock equivalents (stock options and restricted stock) |  |                                      | 425    |                                    |   |       |  |      | 281    |  |   |      
|                                                              |  |                                      |        |                                    |   |        |  |      |        |  |   |       
|Diluted weighted average shares outstanding                   |  |                                      | 21,270 |                                    |   | 20,811 |  |      | 21,112 |  |   | 20,811
|                                                              |  |                                      |        |                                    |   |        |  |      |        |  |   |       
|Diluted earnings per share                                    |  | $                                    | 0.09   |                                    | $ | 0.04   |  | $    | 0.39   |  | $ | 0.16  
|                                                              |  |                                      |        |                                    |   |        |  |      |        |  |   |       



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8. SHARE-BASED PAYMENTS

On September 1, 2005, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123(R)), which requires the measurement and recognition of compensation expense for
share-based payment awards. We recorded $0.8 million of share-based expense for the three months ended February 29, 2008 and February 28, 2007, respectively. The Company recorded $1.7 million and $1.6 million of share-based expense for the
six months ended February 29, 2008 and 2007, respectively.

Prior to the October 31, 2007 spin-off, Zep participated in Acuity
Brands long-term incentive programs that provided qualified and non-qualified equity awards to officers and employees of Acuity Brands and its wholly owned subsidiaries. In connection with the spin-off, we established the Zep Inc. Long-Term
Incentive Plan (Zep LTIP). The purposes of the Zep LTIP are to provide additional incentives to our officers, key executives and directors whose substantial contributions are essential to our continued success. To accomplish these
purposes, the Zep LTIP provides that the Company may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and performance shares to key personnel and
directors. A total of 4.3 million shares of Zeps common stock have been reserved for issuance under the Zep LTIP. Generally, stock options awarded pursuant to the Zep LTIP will be issued with exercise prices equal to the fair market value
of our common stock on the date of the grant, will vest proportionately over a four-year period, and will be exercisable for ten years from the grant date. Compensation expense related to these option grants will be recognized over the requisite
service period. Restricted shares of Zeps common stock awarded under the Zep LTIP will generally vest proportionally over a four-year period. The fair value of restricted stock awards will be measured based on their date of grant fair market
value, and the related compensation expense will be recognized over a requisite service period equal to the awards vesting period.

At the time of the spin-off, each of Acuity Brands and Zeps current and former employees holding unvested shares of restricted stock of Acuity Brands received a dividend of one share of Zep restricted stock for each two shares of
Acuity Brands unvested restricted stock held. The shares of Zep stock received as a dividend are subject to the same restrictions and terms as the Acuity Brands restricted stock. The shares of Zep common stock will be fully paid and non-assessable,
and the holders thereof will not be entitled to preemptive rights. Restricted shares outstanding under the Zep LTIP totaled 0.4 million shares as a result of the October 31, 2007 dividend distribution.

At the time of the spin-off, Acuity Brands stock options held by Zeps current employees (but not former employees) were generally converted to, and
replaced by, Zep stock options in accordance with a conversion ratio such that the intrinsic value of the underlying awards remained unaffected by the spin-off. Also, Acuity Brands stock options held by current and former Acuity Brands employees and
former Zep employees were adjusted with regard to the exercise price and number of Acuity Brands shares underlying the Acuity Brands stock options to maintain the intrinsic value of the options, pursuant to the applicable Acuity Brands long-term
incentive plan. Options subjected to this conversion totaled 0.4 million. The exercise prices associated with converted options ranged from $4.62 to $10.71.

Effective immediately after the spin-off of the specialty products business, approximately 25,000 shares represented by restricted stock units were converted in the same manner as the above mentioned stock option
awards.

Under the Zep LTIP and in connection with the spin-off, on November 5, 2007 our Board of Directors approved a restricted
stock award and stock option grant to Zeps officers and other key employees with an aggregate value of $8.4 million. Our Board of Directors determined that the majority of these awards would be issued on November 14, 2007. This award was
composed of 1) an annual award that is typically granted in the fall of each calendar year in recognition of prior fiscal year performance, and 2) a one-time founders award intended to motivate recipients to contribute to the future growth and
profitability of Zep. On November 14, 2007, we issued approximately 441,000 stock options and restricted stock awards in connection with performance provided by our employees during fiscal 2007, with approximately three-fourths of these
awards composed of stock option grants. We issued approximately 927,000 stock options, restricted stock awards, and restricted stock units on that date in connection with the founders award, with approximately three-fourths of these awards
composed of stock option grants. Additionally, on November 14, 2007 we issued each of our non-employee directors approximately 12,000 restricted stock awards.



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9. INCOME TAXES

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement implications of tax positions taken or expected to be taken in a companys tax return. The interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure of such positions. We adopted FIN 48 effective September 1, 2007. Federal and state income tax liabilities relating to periods
prior to the spin-off remain the responsibility of Acuity Brands pursuant to the tax disaffiliation agreement, and, therefore, the adoption of this pronouncement had a de minimus impact on our results from operations and financial position during
the six months ended February 29, 2008. As of the adoption date, we had gross tax-effected unrecognized tax benefits (including interest and penalties) of $1.1 million, none of which, if recognized, would affect our effective tax rate due to
the offsetting receivable from Acuity Brands provided for in the tax disaffiliation agreement.

We recognize potential accrued interest and
penalties related to unrecognized tax benefits in income tax expense. During the six months ended February 29, 2008, there were no material changes to the amount of gross tax-effected unrecognized tax benefits or interest and penalties recorded
by the Company.

We conduct business globally, and as a result, one or more of our subsidiaries files income tax returns in the U.S.
federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including various jurisdictions in Europe, Canada and the United States.
With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations for years before 2004, or non-U.S. income tax examinations for years before 2001.

10. COMPREHENSIVE INCOME

We account for comprehensive income as prescribed by SFAS No. 130,
Reporting Comprehensive Income(SFAS No. 130). SFAS No. 130 requires the reporting of a measure of all changes in equity that result from recognized transactions and other economic events other than transactions with
owners in their capacity as owners. Other comprehensive income includes foreign currency translation adjustments. We currently intend to indefinitely reinvest all undistributed earnings of and original investments in foreign subsidiaries, thus
the foreign currency translation adjustments presented in the below listed tabular disclosure as well as within our Consolidated and Combined Statements of Stockholders Equity and Comprehensive Income are not affected by domestic income
taxes. The calculation of comprehensive income is as follows:



|                                         |  |                                      |       |      |                                    |        |      |  |      |        |  |   |        |  
|---------------------------------------- |  | ------------------------------------ | ----- | ---- | ---------------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                         |  | Three Months EndedFebruary 29 and 28 |       |      | Six Months EndedFebruary 29 and 28 |       
|                                         |  | 2008                                 |       | 2007 |                                    |        | 2008 |  | 2007 |       
|Net income                               |  | $                                    | 1,907 |      | $                                  | 910    |      |  | $    | 8,187  |  | $ | 3,342  |  
|Foreign currency translation adjustments |  |                                      | 1,331 |      |                                    | (1,471 | )    |  |      | 4,551  |  |   | (2,523 | )
|                                         |  |                                      |       |      |                                    |        |      |  |      |        |  |   |        |  
|Comprehensive income                     |  | $                                    | 3,238 |      | $                                  | (561   | )    |  | $    | 12,738 |  | $ | 819    |  
|                                         |  |                                      |       |      |                                    |        |      |  |      |        |  |   |        |  

Foreign currency translation adjustments for the three and six months ended February 29, 2008
resulted primarily from the weakening of the U.S. Dollar against certain currencies, particularly the Canadian Dollar and the Euro.

11. SUBSEQUENT
EVENT FOOTNOTE

The distribution agreement entered into between Zep and Acuity Brands provided for a cash settlement. This cash
settlement is determinable upon a calculation involving the combined result of our cash flow during fiscal year 2007, plus or minus our actual cash flow during the period from September 1, 2007 until the distribution date (less any cash held by
us on the distribution date). The calculation was finalized on April 11, 2008, and Acuity Brands will remit approximately $4.0 million, plus interest to Zep in accordance with the cash settlement stipulated within the distribution agreement.



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

The following discussion should be read in conjunction with the Consolidated and Combined Financial Statements and related notes thereto.
References made to years are for fiscal year periods.

The purpose of this discussion and analysis is to enhance the understanding and
evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Zep for the three and six months ended February 29, 2008 and February 28, 2007. For a more complete understanding
of this discussion, please read the Notes to Consolidated and Combined Financial Statements included in this report. Also, please refer to our Annual Report on Form 10-K for the fiscal year ended August 31, 2007, filed with the
Securities and Exchange Commission on November 29, 2007, for additional information regarding us including the audited combined financial statements of Zep as of and for the three years ended August 31, 2007 and the related notes thereto.

Overview

Company

We are a leading producer, marketer, and service provider of a wide range of
cleaning and maintenance solutions for commercial, industrial, institutional, and consumer end-markets. Our product portfolio includes anti-bacterial and industrial hand care products, cleaners, degreasers, deodorizers, disinfectants, floor
finishes, sanitizers, and pest and weed control products. We continually expand our product portfolio and service offerings through the introduction of new products and formulations as well as new services to meet the demands of the industry and our
customers. We market these products and services under well recognized and established brand names, such as Zep®, Zep Commercial®, Enforcer®, and Selig, some of which have been in existence for more than 70 years. We reach our customers through an experienced international
organization of sales representatives, supported by highly skilled research and development and technical services teams, who collectively provide creative solutions for our customers diverse cleaning and maintenance needs by utilizing their
extensive product expertise and providing customized value added services that we believe distinguish us among our competitors. Due to the seasonal nature of a portion of our business and the number of available selling days, sales in the third and
fourth quarter of our fiscal year have historically outpaced those generated in the first six months of the fiscal year. While these factors will continue to influence the Companys business in the latter portion of fiscal 2008, some weakness
in volume may occur in the remainder of the fiscal year as the Company manages through a difficult economy that is believed to be negatively impacting some of the industries the Company serves. Additionally, as some of the Companys strategic
initiatives are being implemented, particularly those related to demand shaping and entry into industrial distribution, the Companys revenue may be negatively affected. These initiatives are designed to position the Company for future revenue
and earnings growth.

The Separation of Zep Inc. from Acuity Brands, Inc.

The spin-off of Zep by Acuity Brands became effective on October 31, 2007 through a distribution of 100% of the common stock of Zep to Acuity
Brands stockholders (the Distribution). The stock dividend of one share of Zep common stock for every two shares of Acuity Brands common stock was distributed on a pro rata basis to holders of record of Acuity Brands common stock
at the close of business on October 17, 2007, which was the record date for the Distribution. No fractional shares of Zep common stock were distributed. Instead of fractional shares, Zep stockholders received cash. Following the Distribution,
Acuity Brands does not own any shares of Zep as the spin-off rendered Zep an independent public company. In conjunction with the separation of their businesses, Zep and Acuity Brands entered into various agreements that address the allocation of
assets and liabilities between them and that define their relationship after the separation, including the Agreement of Plan of Distribution, which we refer to as the distribution agreement, the tax disaffiliation agreement, the employee benefits
agreement, and the transition services agreement. The Internal Revenue Service has issued a private letter ruling supporting the spin-offs tax-free status, and Zep continues to conduct its operations in a manner that is compliant with the
conditions set forth by that ruling. Zep and Acuity Brands have also received an opinion from their external counsel supporting the spin-offs tax-free status. The stock of Zep is listed on the New York Stock Exchange under the ticker symbol
ZEP.

Liquidity and Capital Resources

Our principal sources of liquidity are operating cash flows generated primarily from operating activities and various sources of borrowings. Our ability to generate sufficient cash flow from operations and to access
certain capital markets, including banks, is necessary for us to fund our operations, to pay dividends, to meet obligations as they become due, and to maintain compliance with covenants contained within our financing agreements. Our ongoing
liquidity will depend on a number of factors, including available cash resources, cash flow from operations, compliance with covenants contained in certain of our financing agreements, and the ability to access capital markets. Based on our current
cash on hand, current financing arrangements, and current projections of cash flow from operations, management believes that the Company will be able to meet its liquidity needs over the next twelve months.

On October 19, 2007, we executed two debt facilities that were utilized to finance the $62.5 million dividend payment made to Acuity Brands on
October 31, 2007. Further detail regarding these debt instruments is provided in the Capitalization section below as well as in the Notes to Consolidated and Combined Financial Statements.



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Cash Flow

We use available cash and cash flow provided by operating activities primarily to fund operations and capital expenditures. Historically, after these obligations were met, any excess domestic as well as periodic
repatriation of certain foreign cash balances have been remitted to Acuity Brands.

The Companys operating activities consumed a net
$2.1 million during the first six months of fiscal 2008 compared with $8.7 million used in the prior-year period. Cash flow used for operating activities improved $6.6 million due primarily to increased net income, improved collections on
accounts receivable, and the favorable impact of currency appreciation on foreign denominated assets.

Operating working capital
(calculated by adding accounts receivable, net, plus inventories, and subtracting accounts payable) increased by approximately $0.5 million to $101.8 million at February 29, 2008 from $101.4 million at August 31, 2007. The increase in
operating working capital was due to increased inventory as a result of replenishing our stock position and decreased accounts payable due to the timing of payments to suppliers partially offset by the improvements in accounts receivable noted
above.

Management believes that investing in assets and programs that will over time increase the overall return on our invested capital
is a key factor in driving stockholder value. We invested $3.1 million in the first six months of fiscal 2008 primarily for machinery, equipment, and information technology. We expect our investment in such assets and programs to approximate between
$8.0 million to $10.0 million in fiscal 2008.



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Capitalization

Borrowings Preceding the Spin-Off

The debt levels and associated interest costs reflected within the historical combined
financial statements prior to the Distribution date of October 31, 2007 (the Distribution Date) reflect assumptions regarding prospective debt issuances based upon our anticipated financial condition on or about the time of the
spin-off. Debt in the amount of $75.0 million was assumed to have been outstanding during all periods preceding the Distribution Date. Accordingly, Zep has reflected the interest expense associated with these borrowings within its historical results
of operations as though $75.0 million in total borrowings had been outstanding during all periods presented therein.

Borrowings Following the Spin-Off

On October 19, 2007, we executed a receivables facility and a revolving credit facility in anticipation of the spin-off, and the
significant terms of each of those facilities are discussed below. We drew $62.5 million from that revolving credit facility on October 31, 2007, and these proceeds were immediately distributed to Acuity Brands. Additionally, we assumed a $7.2
million industrial revenue bond due in 2018 and approximately $0.3 million of other debt following the spin-off. Further detail regarding each of these debt instruments including amounts outstanding under each as of February 29, 2008 is
provided below.

Revolving Credit Facility

On October 19, 2007, we entered into a $100 million unsecured revolving credit facility (Revolving Credit Facility) with a syndicate of commercial banks. The Revolving Credit Facility contains
customary covenants regarding the preservation and maintenance of our corporate existence, material compliance with laws, payment of taxes, and maintenance of insurance and of our properties. Further, the Revolving Credit Facility contains financial
covenants including a leverage ratio (Maximum Leverage Ratio) of total indebtedness to EBITDA (earnings before interest, taxes, depreciation and amortization expense) as such terms are defined in the Revolving Credit Facility agreement,
and a minimum interest coverage ratio (Minimum Interest Coverage Ratio). These ratios are computed at the end of each fiscal quarter for the most recent 12-month period. The Revolving Credit Facility allows for a Maximum Leverage Ratio
of 3.25x and a Minimum Interest Coverage Ratio of 2.50x. The Revolving Credit Facility includes customary events of default, including, but not limited to, the failure to pay any interest, principal or fees when due, the failure to perform any
covenant or agreement, inaccurate or false representations or warranties, a material adverse change, insolvency or bankruptcy, change of control, the occurrence of certain ERISA events, and judgment defaults. We were in compliance with all related
financial covenants at February 29, 2008.

Generally, amounts outstanding under the Revolving Credit Facility bear interest at a
base rate or a Eurocurrency Rate. Base rate advances are denominated in U.S. Dollars, and amounts outstanding bear interest at a fluctuating rate equal to JPMorgans base rate. Eurocurrency rate advances can be
denominated in a variety of currencies, including U.S. Dollars, and amounts outstanding bear interest at a periodic fixed rate equal to LIBOR for the applicable currency plus an applicable margin. The applicable margins are based on our leverage
ratio, as defined in the Revolving Credit Facility, with such margins ranging from 0.50% to 1.00%. Interest on both base rate and Eurocurrency rate advances are payable upon the earlier of maturity of the outstanding loan or quarterly if the loan is
for a period greater than three months. The Revolving Credit Facility will mature and all amounts outstanding thereunder will be due and payable on October 19, 2012.

As of February 29, 2008, borrowings under the Revolving Credit Facility totaled $66.6 million. Of that total outstanding amount, $4.1 million has been classified as Short-term debt on our Consolidated
and Combined Balance Sheets in accordance with the maturity date associated with those borrowings. Our Consolidated and Combined Balance Sheets include approximately $10.0 million of borrowings made under this agreement that have been
classified as Current maturities of long-term debt reflecting our intention to settle that amount during fiscal year 2008. The remaining $52.5 million has been reported within Long-term debt, less current maturities. The base interest
rate associated with borrowings made under the Revolving Credit Facility subsequent to the spin-off approximated 4.3%. As of February 29, 2008, we had additional borrowing capacity under the Revolving Credit Facility of $31.1 million, which
represents the full amount of the Revolving Credit Facility less the aforementioned borrowings as well as the outstanding letters of credit of $2.3 million that were issued under the Revolving Credit Facility and are discussed below.



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Receivables Facility

On October 19, 2007, we entered into a Credit and Security Agreement (Receivables Facility) that allows us to borrow, on an ongoing basis, up to $40 million secured by undivided interests in a defined
pool of trade accounts receivable of the Company. Interest rates under the Receivables Facility vary with asset-backed commercial paper rates plus an applicable margin of 0.325%. Net trade accounts receivable pledged as security for borrowings under
the Receivables Facility totaled $32.9 million at February 29, 2008, and there were no outstanding borrowings under the Receivables Facility as of that date. The Receivables Facility contains customary reporting and compliance covenants as well
as a cross-default provision whereby we would be in default should an occurrence of a default or an event of a default result under any other financing arrangement where we are a debtor or an obligor to debt in excess of $25 million. We were in
compliance with all related financial covenants at February 29, 2008.

Industrial Revenue Bonds

The industrial revenue bonds due 2018 were issued by the City of DeSoto Industrial Development Authority, Inc. in May 1991 in connection with the
construction of Zeps facility in that city. We are required to make principal and interest payments on the bonds. We will fulfill these requirements by making interest payments on a quarterly basis, and by settling the associated principal
obligation in 2018 upon maturity. The payment of principal and interest on the bonds is secured by an irrevocable letter of credit issued by Wachovia Bank, National Association. The bonds currently bear interest at a weekly rate. The interest rate
during the six months ended February 29, 2008 and February 28, 2007 averaged 3.2% and 3.6%, respectively. Pursuant to certain cross-default provisions relating to our industrial revenue bonds, a breach of financial covenants set forth in
our Revolving Credit Facility Agreement constituting an event of default under the Revolving Credit Facility Agreement would also constitute an event of default under our industrial revenue bonds.

Letters of Credit

Subsequent to
August 31, 2007 and in connection with the spin-off, we issued outstanding letters of credit totaling $9.8 million primarily for the purpose of securing collateral requirements under our casualty insurance programs and for providing credit
support for our industrial revenue bonds. At February 29, 2008, a total of $2.3 million of the letters of credit were issued under the Revolving Credit Facility, thereby reducing the total availability under the facility by such amount.

Dividends

We paid
cash dividends on common stock of $0.8 million or $0.04 per share during the six months ended February 29, 2008. On March 27, 2008, our Board of Directors declared a quarterly dividend of $0.04 per share. We expect to pay a regular
quarterly dividend at an initial annual rate of $0.16 per share. Our ability to fund a regular quarterly dividend is impacted by our financial results and the availability of surplus funds. Delaware law prohibits the payment of dividends or
otherwise distributing funds to our stockholders absent a legally available surplus. Our ability to generate positive cash flows from operating activities directly affects our ability to make dividend payments. Also, restrictions under the
instruments governing our indebtedness could impair our ability to make such payments. Effective as of the date of the spin-off, payments on our indebtedness and the quarterly dividend are expected to account for the majority of our financing
activities.

All decisions regarding the declaration and payment of dividends, including with respect to our initial dividend, are at the
discretion of our Board of Directors and are evaluated periodically in consideration of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors our Board of Directors deems relevant. We do not
currently have plans to change our annual dividend rate.

Cash Settlement with Acuity Brands

The distribution agreement entered into between Zep and Acuity Brands provided for a cash settlement. This cash settlement is determinable upon a
calculation involving the combined result of our cash flow during fiscal year 2007, plus or minus our actual cash flow during the period from September 1, 2007 until the distribution date (less any cash held by us on the distribution date). The
calculation was finalized on April 11, 2008, and Acuity Brands will remit approximately $4.0 million, plus interest to Zep in accordance with the cash settlement stipulated within the distribution agreement.



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##### Table of Contents

Results of Operations

Second Quarter of Fiscal 2008 Compared with Second Quarter of Fiscal 2007

The following table sets forth information
comparing the components of net income for the three months ended February 29, 2008 with the three months ended February 28, 2007:



|                                  |  |                                      |       |   |         |   |       |        |  |       |   
|--------------------------------- |  | ------------------------------------ | ----- | - | ------- | - | ----- | ------ |  | ----- | --
|                                  |  | Three Months EndedFebruary 29 and 28 |       |   | Percent |  
|(Dollars in millions)             |  | 2008                                 |       |   | 2007    |   |       | Change | 
|Net Sales                         |  | $                                    | 133.2 |   |         | $ | 131.1 |        |  | 1.6   | % 
|Gross Profit                      |  |                                      | 74.4  |   |         |   | 74.5  |        |  | (0.2  | )%
|Percent of net sales              |  |                                      | 55.9  | % |         |   | 56.9  | %      |  |       |   
|Operating Profit                  |  |                                      | 3.9   |   |         |   | 3.8   |        |  | 1.3   | % 
|Percent of net sales              |  |                                      | 2.9   | % |         |   | 2.9   | %      |  |       |   
|Income before Provision for Taxes |  |                                      | 3.0   |   |         |   | 2.6   |        |  | 14.4  | % 
|Percent of net sales              |  |                                      | 2.2   | % |         |   | 2.0   | %      |  |       |   
|Net Income                        |  | $                                    | 1.9   |   |         | $ | 0.9   |        |  | 109.6 | % 

Net Sales

Net sales were $133.2 million in the second quarter of fiscal 2008 compared with $131.1 million in the year-ago period, representing an increase of $2.1
million or 1.6%. The increase in net sales was due primarily to the favorable effect of foreign currency translation on international sales as well as to higher selling prices captured primarily within our domestic markets. Foreign currency
fluctuation and higher selling prices favorably impacted net sales in the second quarter of fiscal 2008 by approximately $3.6 million and $2.4 million, respectively.

The favorable impact of fluctuation in foreign currencies and higher selling prices was partially offset by volume declines in our domestic markets. More specifically, unit volume was adversely impacted by the
softening retail marketplace within which we participate. Additionally, volume generated by sales to customers within the transportation industry declined during the three months ended February 29, 2008. Partially offsetting the aforementioned
volume declines was the improved demand seen in our European markets as well as from customers served in the government and food processing industries.

Gross Profit



|                      |  |                                      |       |   |          |   |       |            |  |   |        |   |  |      |   
|--------------------- |  | ------------------------------------ | ----- | - | -------- | - | ----- | ---------- |  | - | ------ | - |  | ---- | --
|                      |  | Three Months EndedFebruary 29 and 28 |       |   | Increase |   |       | Percent    | 
|(Dollars in millions) |  | 2008                                 |       |   | 2007     |   |       | (Decrease) |  |   | Change |  
|Net Sales             |  | $                                    | 133.2 |   |          | $ | 131.1 |            |  | $ | 2.1    |   |  | 1.6  | % 
|Cost of Products Sold |  |                                      | 58.8  |   |          |   | 56.5  |            |  |   | 2.2    |   |  | 4.0  | % 
|Percent of net sales  |  |                                      | 44.1  | % |          |   | 43.1  | %          |  |   |        |   |  |      |   
|Gross Profit          |  | $                                    | 74.4  |   |          | $ | 74.5  |            |  | $ | (0.1   | ) |  | (0.2 | )%
|Percent of net sales  |  |                                      | 55.9  | % |          |   | 56.9  | %          |  |   |        |   |  |      |   

Gross profit decreased $0.1 million, or 0.2%, to $74.4 million in the second quarter of fiscal
2008 compared with $74.5 million in the second quarter of fiscal 2007. Gross profit margin of 55.9% in the second quarter of fiscal 2008 declined 100 basis points from that of the prior years second fiscal quarter. Gross profit was favorably
impacted by the aforementioned foreign currency fluctuation and higher selling prices that resulted in increased net sales. However, this improvement was partially offset by unfavorable trends affecting our raw material costs, particularly those
commodities affected by energy inputs. Also, manufacturing related costs during the three months ended February 29, 2008 were higher compared with the same year-ago period due in part to investments made to increase future productivity. We
incurred increased raw material and manufacturing related costs of approximately $2.3 million during the three months ended February 29, 2008 compared with the second quarter of fiscal 2007. Increased pricing that only recovers rising costs in
dollars results in the dilution of gross profit margin.



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Operating Profit



|                                                   |  |                                      |      |   |      |   |      |                    |  |   |               |   |  |       |   
|-------------------------------------------------- |  | ------------------------------------ | ---- | - | ---- | - | ---- | ------------------ |  | - | ------------- | - |  | ----- | --
|                                                   |  | Three Months EndedFebruary 29 and 28 |      |   |      |  
|(Dollars in millions)                              |  | 2008                                 |      |   | 2007 |   |      | Increase(Decrease) |  |   | PercentChange |  
|Gross Profit                                       |  | $                                    | 74.4 |   |      | $ | 74.5 |                    |  | $ | (0.1          | ) |  | (0.2  | )%
|Percent of net sales                               |  |                                      | 55.9 | % |      |   | 56.9 | %                  |  |   |               |   |  |       |   
|Selling, Distribution, and Administrative Expenses |  |                                      | 69.8 |   |      |   | 70.7 |                    |  |   | (0.9          | ) |  | (1.3  | )%
|Restructuring Charge                               |  |                                      | 0.8  |   |      |   |     |                    |  |   | 0.8           |   |  | 100.0 | % 
|Operating Profit                                   |  | $                                    | 3.9  |   |      | $ | 3.8  |                    |  | $ |              |   |  | 1.3   | % 
|Percent of net sales                               |  |                                      | 2.9  | % |      |   | 2.9  | %                  |  |   |               |   |  |       |   

Operating profit generated during the three months ended February 29, 2008 totaled $3.9
million compared with $3.8 million earned during the three months ended February 28, 2007. Operating profit margins remained consistent at 2.9% during those periods. Foreign currency translation had an overall favorable impact on operating
profit of approximately $0.3 million.

The Company reduced its selling, distribution, and administrative (SD&A) expenses by
an aggregate $0.9 million during the second quarter of fiscal 2008 compared with the second quarter of fiscal 2007. The Companys SD&A expenses during the second quarter of fiscal 2007 were adversely impacted by the $1.8 million charge
recorded in connection with the settlement of an investigation into certain past environmental practices. Related legal fees incurred during the second quarter of fiscal 2007 totaled $1.2 million. Also, in the second quarter of fiscal 2008 we
incurred approximately $0.5 million less in expenses due to the disciplined control of certain sales related costs. Partially offsetting these savings was the $2.0 million negative impact of foreign currency translation on total SD&A expenses.
Also, the Company made $0.5 million in investments in the second quarter of fiscal 2008 to support certain strategic initiatives.

Operating results for our second fiscal quarter of 2007 reflect an allocation of certain administrative costs associated with functions that were historically managed by our parent on our behalf prior to the spin-off. These functions
include treasury, tax, executive and employee benefits, financial reporting, risk management, legal, corporate secretary and investor relations. Also included in these administrative costs were expenses associated with our equity award programs
designed to incentivize and reward positive performance of our employees. During the second quarter of 2008, as anticipated, the actual costs of these administrative functions outpaced prior years allocated costs by approximately $0.4 million.

Earlier in the fiscal year, management announced its intention to pursue a strategic plan focused upon achieving the Companys
long-term financial objectives. As part of this program, we recorded a net pretax restructuring charge of $0.8 million during February 2008 primarily reflecting costs associated with the elimination of 23 salaried positions.

Income before Provision for Taxes



|                                  |  |                                      |     |   |      |   |     |                    |  |   |               |   |  |       |   
|--------------------------------- |  | ------------------------------------ | --- | - | ---- | - | --- | ------------------ |  | - | ------------- | - |  | ----- | --
|                                  |  | Three Months EndedFebruary 29 and 28 |     |   |      |  
|(Dollars in millions)             |  | 2008                                 |     |   | 2007 |   |     | Increase(Decrease) |  |   | PercentChange |  
|Operating Profit                  |  | $                                    | 3.9 |   |      | $ | 3.8 |                    |  | $ |              |   |  | 1.3   | % 
|Percent of net sales              |  |                                      | 2.9 | % |      |   | 2.9 | %                  |  |   |               |   |  |       |   
|Other Expense (Income)            |  |                                      |     |   |      |   |     |                    |  |   |               |   |  |       |   
|Interest Expense, net             |  |                                      | 0.8 |   |      |   | 1.2 |                    |  |   | (0.4          | ) |  | (31.8 | )%
|Miscellaneous Expense             |  |                                      | 0.1 |   |      |   |    |                    |  |   |              |   |  | 236.0 | % 
|Total Other Expense               |  |                                      | 0.9 |   |      |   | 1.3 |                    |  |   | (0.3          | ) |  | (26.3 | )%
|Income before Provision for Taxes |  | $                                    | 3.0 |   |      | $ | 2.6 |                    |  | $ | 0.4           |   |  | 14.4  | % 
|Percent of net sales              |  |                                      | 2.2 | % |      |   | 2.0 | %                  |  |   |               |   |  |       |   

Other expense remained consistent with that of the prior year period and is composed primarily of
interest expense associated with our outstanding debt obligations. Interest expense, net, was $0.8 million and $1.2 million during the second quarters of fiscal years 2008 and 2007, respectively. The interest rates associated with actual borrowings
during the second quarter of fiscal 2008 were lower than the estimated interest rates that were applied to borrowings reported during the three months ended February 28, 2007.



21



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##### Table of Contents

Provision for Taxes and Net Income



|                                         |  |                                      |      |   |      |   |      |                    |  |   |               |   |  |       |   
|---------------------------------------- |  | ------------------------------------ | ---- | - | ---- | - | ---- | ------------------ |  | - | ------------- | - |  | ----- | --
|                                         |  | Three Months EndedFebruary 29 and 28 |      |   |      |  
|(Dollars in millions)                    |  | 2008                                 |      |   | 2007 |   |      | Increase(Decrease) |  |   | PercentChange |  
|Income before Provision for Income Taxes |  | $                                    | 3.0  |   |      | $ | 2.6  |                    |  | $ | 0.4           |   |  | 14.4  | % 
|Percent of net sales                     |  |                                      | 2.2  | % |      |   | 2.0  | %                  |  |   |               |   |  |       |   
|Provision for Income Taxes               |  |                                      | 1.0  |   |      |   | 1.7  |                    |  |   | (0.6          | ) |  | (37.5 | )%
|Effective tax rate                       |  |                                      | 35.4 | % |      |   | 64.7 | %                  |  |   |               |   |  |       |   
|Net Income                               |  | $                                    | 1.9  |   |      | $ | 0.9  |                    |  | $ | 1.0           |   |  | 109.6 | % 

Net income for the second quarter of fiscal 2008 increased $1.0 million, or 109.6%, to $1.9
million from $0.9 million reported in the second quarter of fiscal 2007. The increase in net income resulted primarily from the increase in operating profit noted above as well as a decrease in our effective tax rate.

The effective tax rate for the second quarter of fiscal 2008 was 35.4%, compared with 64.7% in the same year-ago period. As previously disclosed, the
fiscal 2007 tax rate was adversely affected by the non-deductible fine that was paid in fiscal 2007 to resolve an environmental legal contingency.

Diluted earnings per share increased $0.05 or 125.0% to $0.09 per diluted share in the second quarter of fiscal 2008 from the $0.04 per diluted share earned in the second quarter of fiscal 2007. Earnings in the second quarter of fiscal 2007
were negatively impacted by $0.12 per diluted share due to the non-deductible environmental related charge recorded during that quarter. Earnings in the three months ended February 29, 2008 were negatively impacted by $0.02 per diluted share as
a result of the restructuring charge recorded in that period.



22



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##### Table of Contents

Six Months of Fiscal 2008 Compared with Six Months of Fiscal 2007

The following table sets forth information comparing the components of net income for the six months ended February 29, 2008 with the six months
ended February 28, 2007:



|                                  |  |                                    |       |   |      |   |       |               |  |       |  
|--------------------------------- |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | ----- | -
|                                  |  | Six Months EndedFebruary 29 and 28 |       |   |      |  
|(Dollars in millions)             |  | 2008                               |       |   | 2007 |   |       | PercentChange | 
|Net Sales                         |  | $                                  | 276.7 |   |      | $ | 267.9 |               |  | 3.3   | %
|Gross Profit                      |  |                                    | 157.8 |   |      |   | 153.1 |               |  | 3.0   | %
|Percent of net sales              |  |                                    | 57.0  | % |      |   | 57.2  | %             |  |       |  
|Operating Profit                  |  |                                    | 14.6  |   |      |   | 9.0   |               |  | 62.8  | %
|Percent of net sales              |  |                                    | 5.3   | % |      |   | 3.4   | %             |  |       |  
|Income before Provision for Taxes |  |                                    | 12.7  |   |      |   | 6.5   |               |  | 96.4  | %
|Percent of net sales              |  |                                    | 4.6   | % |      |   | 2.4   | %             |  |       |  
|Net Income                        |  | $                                  | 8.2   |   |      | $ | 3.3   |               |  | 145.0 | %

Net Sales

Net sales were $276.7 million in the six months ended February 29, 2008 compared with $267.9 million generated in the first six months of fiscal
2007, representing an increase of $8.8 million or 3.3%. The increase in net sales was due primarily to the favorable effect of foreign currency translation on international sales as well as to higher selling prices captured primarily within our
domestic markets. Foreign currency fluctuation and higher selling prices favorably impacted net sales in the first half of fiscal 2008 by approximately $7.5 million and $5.2 million, respectively.

The favorable impact of fluctuation in foreign currencies and higher selling prices was partially offset by volume declines in our domestic markets.
Overall unit volume was adversely impacted by the softening retail marketplace within which we participate. Additionally, volume generated by sales to customers within certain industries including transportation declined during the six months ended
February 29, 2008. Partially offsetting those volume declines was the improved demand seen in our European markets as well as from customers served in the government and food processing industries.

Gross Profit



|                      |  |                                    |       |   |      |   |       |                    |  |               |     |  |     |  
|--------------------- |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------------ |  | ------------- | --- |  | --- | -
|                      |  | Six Months EndedFebruary 29 and 28 |       |   |      |  
|(Dollars in millions) |  | 2008                               |       |   | 2007 |   |       | Increase(Decrease) |  | PercentChange |    
|Net Sales             |  | $                                  | 276.7 |   |      | $ | 267.9 |                    |  | $             | 8.8 |  | 3.3 | %
|Cost of Products Sold |  |                                    | 118.9 |   |      |   | 114.8 |                    |  |               | 4.2 |  | 3.6 | %
|Percent of net sales  |  |                                    | 43.0  | % |      |   | 42.8  | %                  |  |               |     |  |     |  
|Gross Profit          |  | $                                  | 157.8 |   |      | $ | 153.1 |                    |  | $             | 4.7 |  | 3.0 | %
|Percent of net sales  |  |                                    | 57.0  | % |      |   | 57.2  | %                  |  |               |     |  |     |  

Gross profit increased $4.7 million, or 3.0% to $157.8 million in the first half of fiscal 2008
compared with $153.1 million in the first half of fiscal 2007. Gross profit margin of 57.0% in the first half of fiscal 2008 declined 20 basis points from that generated during the first half of the prior fiscal year. Improvement in gross profit was
driven primarily by the aforementioned foreign currency fluctuation and higher selling prices. This improvement was partially offset by volume declines as well as the increased cost of raw materials, particularly those affected by energy inputs.
Also, manufacturing related costs during the six months ended February 29, 2008 were higher compared with the same year-ago period due in part to investments made to increase future productivity. On a year-to-date basis, the increase in raw
material and manufacturing costs of $2.5 million were more than offset by higher selling prices. Additionally, our costs of products sold during the six months ended February 29, 2008 were negatively impacted by approximately $3.0 million due
to foreign currency translation.



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##### Table of Contents

Operating Profit



|                                                   |  |                                    |       |   |      |   |       |                    |  |   |               |   |  |        |   
|-------------------------------------------------- |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------------ |  | - | ------------- | - |  | ------ | --
|                                                   |  | Six Months EndedFebruary 29 and 28 |       |   |      |  
|(Dollars in millions)                              |  | 2008                               |       |   | 2007 |   |       | Increase(Decrease) |  |   | PercentChange |  
|Gross Profit                                       |  | $                                  | 157.8 |   |      | $ | 153.1 |                    |  | $ | 4.7           |   |  | 3.0    | % 
|Percent of net sales                               |  |                                    | 57.0  | % |      |   | 57.2  | %                  |  |   |               |   |  |        |   
|Selling, Distribution, and Administrative Expenses |  |                                    | 142.4 |   |      |   | 144.0 |                    |  |   | (1.5          | ) |  | (1.1   | )%
|Restructuring Charge                               |  |                                    | 0.8   |   |      |   |      |                    |  |   | 0.8           |   |  | 100    | % 
|Loss on Sale of Fixed Assets                       |  |                                    |      |   |      |   | 0.2   |                    |  |   | (0.2          | ) |  | (100.0 | )%
|Operating Profit                                   |  | $                                  | 14.6  |   |      | $ | 9.0   |                    |  | $ | 5.6           |   |  | 62.8   | % 
|Percent of net sales                               |  |                                    | 5.3   | % |      |   | 3.4   | %                  |  |   |               |   |  |        |   

Operating profit increased $5.6 million, or 62.8%, in the first half of fiscal 2008 to $14.6
million from $9.0 million reported in the first half of fiscal 2007. Operating profit margins generated during the first six months of fiscal 2008 were 5.3% compared with 3.4% in the prior year period. Foreign currency translation has had an overall
favorable impact on year-to-date operating profit of approximately $0.7 million.

In addition to the favorable impact from improved gross
profit discussed above, we reduced SD&A expenses by an aggregate $1.5 million during the first half of fiscal 2008. The non-recurrence of certain costs associated with legal matters resolved during the prior year contributed to the reduction of
SD&A expenses. During the second quarter of fiscal 2007 the Company recorded a $1.8 million charge in connection with the settlement of an investigation into certain past environmental practices. Related legal fees incurred during the first half
of fiscal 2007 totaled $1.5 million. We incurred approximately $2.0 million less in expenses during the first half of fiscal 2008 due to the disciplined control of certain sales related costs. Additionally, expenses associated with our insurance
programs as well as non-restructuring related severances costs declined approximately $1.2 million compared with the same year-ago period. Partially offsetting these savings was the $3.8 million negative impact from foreign currency translation on
total SD&A expenses. Also, the Company incurred incremental costs compared with the first half of the prior fiscal year of approximately $0.8 million due to investments made to support our strategic initiatives.

Operating results for second half of fiscal 2007 reflect an allocation of certain administrative costs associated with functions that were historically
managed by our parent on our behalf prior to the spin-off. These functions include treasury, tax, executive and employee benefits, financial reporting, risk management, legal, corporate secretary and investor relations. Also included in these
administrative costs were expenses associated with our equity award programs designed to incentivize and reward positive performance of our employees. During the first six months of 2008, as anticipated, the actual costs of these administrative
functions outpaced the prior years allocated costs by approximately $0.8 million.

In the first half of fiscal 2008, management
announced its intention to pursue a strategic plan focused upon achieving the Companys long-term financial objectives. As part of this program, we recorded a net pretax restructuring charge of $0.8 million during February 2008 primarily
reflecting costs associated with the elimination of 23 salaried positions.

Income before Provision for Taxes



|                                  |  |                                    |      |   |      |   |     |                    |  |   |               |   |  |       |   
|--------------------------------- |  | ---------------------------------- | ---- | - | ---- | - | --- | ------------------ |  | - | ------------- | - |  | ----- | --
|                                  |  | Six Months EndedFebruary 29 and 28 |      |   |      |  
|(Dollars in millions)             |  | 2008                               |      |   | 2007 |   |     | Increase(Decrease) |  |   | PercentChange |  
|Operating Profit                  |  | $                                  | 14.6 |   |      | $ | 9.0 |                    |  | $ | 5.6           |   |  | 62.8  | % 
|Percent of net sales              |  |                                    | 5.3  | % |      |   | 3.4 | %                  |  |   |               |   |  |       |   
|Other Expense (Income)            |  |                                    |      |   |      |   |     |                    |  |   |               |   |  |       |   
|Interest Expense, net             |  |                                    | 1.9  |   |      |   | 2.4 |                    |  |   | (0.5          | ) |  | (21.4 | )%
|Miscellaneous (Income) Expense    |  |                                    |     |   |      |   | 0.1 |                    |  |   | (0.1          | ) |  | (97.0 | )%
|Total Other Expense               |  |                                    | 1.9  |   |      |   | 2.5 |                    |  |   | (0.6          | ) |  | (24.5 | )%
|Income before Provision for Taxes |  | $                                  | 12.7 |   |      | $ | 6.5 |                    |  | $ | 6.2           |   |  | 96.4  | % 
|Percent of net sales              |  |                                    | 4.6  | % |      |   | 2.4 | %                  |  |   |               |   |  |       |   

Other expense remained consistent with that of the prior year period and is composed primarily of
interest expense associated with our outstanding debt obligations. Interest expense, net, was $1.9 million and $2.4 million during the first half of fiscal years 2008 and 2007, respectively. The interest rates associated with actual borrowings
during the second half of fiscal 2008 were lower than the estimated interest rates that were applied to borrowings reported during the six months ended February 28, 2007.



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##### Table of Contents

Provision for Taxes and Net Income



|                                         |  |                                    |      |   |      |   |      |                    |  |               |     |  |       |  
|---------------------------------------- |  | ---------------------------------- | ---- | - | ---- | - | ---- | ------------------ |  | ------------- | --- |  | ----- | -
|                                         |  | Six Months EndedFebruary 29 and 28 |      |   |      |  
|(Dollars in millions)                    |  | 2008                               |      |   | 2007 |   |      | Increase(Decrease) |  | PercentChange |    
|Income before Provision for Income Taxes |  | $                                  | 12.7 |   |      | $ | 6.5  |                    |  | $             | 6.2 |  | 96.4  | %
|Percent of net sales                     |  |                                    | 4.6  | % |      |   | 2.4  | %                  |  |               |     |  |       |  
|Provision for Income Taxes               |  |                                    | 4.5  |   |      |   | 3.1  |                    |  |               | 1.4 |  | 44.7  | %
|Effective tax rate                       |  |                                    | 35.7 | % |      |   | 48.5 | %                  |  |               |     |  |       |  
|Net Income                               |  | $                                  | 8.2  |   |      | $ | 3.3  |                    |  | $             | 4.8 |  | 145.0 | %

Net income for the first half of fiscal 2008 increased $4.8 million, or 145.0%, to $8.2 million
from $3.3 million reported in the first half of fiscal 2007. The increase in net income resulted primarily from the increase in operating profit noted above as well as a decrease in our effective tax rate.

The effective tax rate for the first half of fiscal 2008 was 35.7%, compared with 48.5% in the year-ago period. As previously disclosed, the fiscal 2007
tax rate was adversely affected by the non-deductible fine that was paid in fiscal 2007 to resolve an environmental legal contingency. Our effective tax rate is anticipated to approximate 36% in fiscal 2008 under our current business model.

Diluted earnings per share generated during the first six months of fiscal year 2008 of $0.39 increased $0.23 per diluted share or 143.8%
from the $0.16 per diluted share earned in the prior year period. Earnings in the second half of fiscal 2007 were negatively impacted by $0.12 per diluted share due to non-deductible environmental related charge recorded during that quarter.
Earnings in the six months ended February 29, 2008 were negatively impacted by $0.02 per diluted share as a result of the restructuring charge recorded during February 2008.

Outlook and Strategy

Previously, as a wholly-owned subsidiary of a public company, Zeps role
was that of a cash generating, low risk and relatively slow growth entity. Now that we are a stand-alone business, Zeps focus and mission have dramatically changed. The Company is now positioned to transform itself into a dynamic,
market-driven enterprise that not only delivers superior products and customer service, but that also continuously strengthens its top and bottom line financial performance.

We are led by an experienced executive management team having extensive business development, transformation and growth expertise. Drawing upon this
knowledge, we devised a strategic plan that we expect will produce near and long-term results and support strong financial growth  particularly in sales, margins and return on invested capital  producing significant shareholder value.

We believe our strategy has several levers to increase profitability and cash flows. During the next three years of our transformational
plans we intend to improve margins and working capital turns through the utilization of Lean methodologies, demand shaping activities, and our North American Manufacturing and Distribution Strategy (NAMADS). Lean focuses on eliminating waste from
all processes and improving customer service. Demand shaping concentrates on reducing the complexity of our product and customer portfolio and, subsequently, dedicating valuable resources only to our more important and profitable products and
customers.

During fiscal year 2008, we intend to initiate NAMADS which will deploy regional manufacturing plants to proximities closer to
our customers, evaluate competitive outsourcing further, and realign our current inventory stocking locations. We anticipate these efforts will increase profitability and better service our customers.

Efforts are underway to continue growing our business in the industrial and institutional cleaning and maintenance chemicals market by focusing on new
product vitality, expansion of existing channels and the leveraging of the Zep Sales & Service organization.

We anticipate that
significant revenue growth can be achieved as we execute on our long-term strategy of entering and penetrating the $6.4 billion industrial distribution channel. These efforts, we anticipate, could produce 10-15% of total Company revenues within
three years. We plan to accomplish growth into these channels organically and through targeted acquisitions. Initially, certain of our initiatives may cause us to experience a decline in sales. However, in the long-term we believe our margins will
improve as we eliminate unprofitable business and continue to right-size the organization.



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##### Table of Contents

Long-Term Financial Objectives

We are focused on creating a stronger, more effective organization capable of increasing stockholder value. To this end, we have established the following
long-term financial objectives:



| |  |  | Revenue growth in excess of market growth rates on an annualized basis, which in the United States has approximated Gross Domestic Product, in the past. We plan on
realizing these results without any benefits gained through significant acquisitions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Annualized EBIT margin improvement of 50 basis points per year;
| | - |  | ---------------------------------------------------------------



| |  |  | Earnings per share increases of 11  13% per year; and
| | - |  | ------------------------------------------------------



| |  |  | Returns on invested capital of greater than 15%.
| | - |  | ------------------------------------------------

While these long-term financial objectives are expressed in terms of annualized improvement, we are in the beginning stages of implementing our three-pronged strategic plan. We consider fiscal 2008 a transformational
year that is focused on the execution of our long-term strategies and the positioning of the Company for future profitable growth. Initially, we anticipate inconsistent results as we undertake various restructuring initiatives. While the ultimate
cost of this restructuring effort is undetermined at this time, related expenses could approximate $8 million in this fiscal year.

Challenges exist that must be addressed and managed in order to accomplish our key strategic initiatives, including the continuing rapid increase of commodity costs which may require us to raise prices more frequently; that historically has
had a negative impact on unit volumes. We will continue to monitor economic variables such as costs for energy and raw materials, potential economic repercussions that could result from instability caused by worldwide political events, and the
potential for changes in competition, including pricing. Other economic factors could negatively influence our performance in certain channels or industries such as retail and transportation. Due to the seasonal nature of a portion of our business
and the number of available selling days, sales in the third and fourth quarter of our fiscal year have historically outpaced those generated in the first six months of the fiscal year. While these factors will continue to influence the
Companys business in the latter portion of fiscal 2008, some weakness in volume may occur in the remainder of the fiscal year as the Company manages through a difficult economy that is believed to be negatively impacting some of the industries
the Company serves. Additionally, as some of the Companys strategic initiatives are being implemented, particularly those related to demand shaping and entry into industrial distribution, the Companys revenue may be negatively affected.
These initiatives are designed to position the Company for future revenue and earnings growth. Most importantly, management anticipates that the Company will remain a business that consistently produces solid cash flow on an annual basis regardless
of economic conditions.

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of Operationsaddresses the financial condition and results of operations as reflected in our Consolidated and Combined Financial
Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and judgments, including those related to: inventory valuation; share-based compensation expense, depreciation, amortization and the recoverability of long-lived assets, including intangible assets;
medical, product warranty, and other reserves; litigation; and environmental matters. Management bases its estimates and judgments on its substantial historical experience and other relevant factors, 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 could differ from those estimates. Management discusses the development of accounting estimates with Zeps Audit
Committee. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment, please refer to our Form 10-K for the year ended August 31, 2007 filed with the Securities and Exchange Commission on
November 29, 2007.

Cautionary Statement Regarding Forward-Looking Information

This filing contains, and other written or oral statements made by or on behalf of us may include, forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995. In addition, we, or the executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the SEC or in connection with oral
statements made to the press, potential investors or others. Specifically, forward-looking statements may include, but are not limited to:



| |  |  | statements relating to our future economic performance, business prospects, revenue, income, and financial condition; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | statements relating to the tax-free nature of the distribution of Zep common stock to stockholders of Acuity Brands in the spin-off; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | statements preceded by, followed by, or that include the words expects, believes, intends, anticipates, and similar
terms that relate to future events, performance, or results of the company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Examples of forward-looking statements made in this report include, without limitation, statements made
relating to: (a) our belief that the probability the Distribution will be deemed a taxable event is remote; (b) our expectations regarding liquidity based on cash on hand, availability under existing financing arrangements, and current
projections of net cash provided by operating activities; (c) our expectation that during fiscal year 2008 we will invest approximately $8.0 million to $10.0 million for machinery, equipment, and information technology, and our belief that
these investments will improve productivity and product quality, increase manufacturing efficiencies, and enhance customer service capabilities during fiscal year 2008; (d) the Companys belief that it is positioned to transform itself
into a dynamic, market-driven enterprise that is poised for sustainable profitable growth now that it is conducting operations as a stand-alone business; (e) the expectation that our strategic plan will produce long-term results supporting
strong financial growth; (f) the intention to initiate our North American Manufacturing and Distribution Strategy during fiscal 2008 as well as the benefits that may result from the initiation of this strategy; (g) any anticipated benefits
from demand shaping efforts and the impact on products or customers; (h) any anticipated effects that entrance into the $6.4 billion industrial distribution channel might have on our revenues over the coming years; (i) the plan to
accomplish growth in the industrial distribution channel through both organic growth and targeted acquisitions; (j) our view that fiscal 2008 is a transformational year and our anticipation that initial operating results will be inconsistent as
we progress towards attaining our long-term financial objectives; (k) estimates of the cost of our restructuring initiatives; (l) the expectation that our strategic initiatives will be implemented with aggressive, but focused direction,
careful deliberation and skill, and that we intend to make meaningful progress in the execution of our strategic initiatives in the coming year; (m) the impact that managing through current economic conditions may have on our customers and
ultimately our own sales volumes; and (n) the short-term impact that the implementation of certain of our strategic initiatives might have on net sales.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results, expectations, or outcomes to differ materially from our historical experience and the historical experience of
Acuity Brands as well as managements present expectations or projections. These risks and uncertainties include, but are not limited to:



| |  |  | customer and supplier relationships and prices;
| | - |  | -----------------------------------------------



| |  |  | competition;
| | - |  | ------------



| |  |  | ability to realize anticipated benefits from strategic planning initiatives and timing of benefits;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | market demand; and
| | - |  | ------------------



| |  |  | litigation and other contingent liabilities, such as environmental matters.
| | - |  | ---------------------------------------------------------------------------

A variety of other risks and uncertainties could cause our actual results to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. A number of those risks are discussed in Part I, Item 1a. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended August 31, 2007, which is incorporated herein by
reference.

Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any
forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or
future events.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Zep is exposed to market risks that may impact the Consolidated and Combined Balance Sheets, Consolidated and Combined Statements of Income, and Consolidated and Combined Statements of Cash Flows
due primarily to fluctuation in both interest rates and foreign exchange rates. There have been no material changes to our exposure from market risks from those disclosed in Part II, Item 7A to our Annual Report on Form 10-K for the year ended
August 31, 2007.



|Item 4. | Controls and Procedures
|------- | -----------------------

Disclosure controls and procedures are controls and other procedures that are designed to reasonably ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to reasonably ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act is accumulated and communicated to management, including the principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As required by SEC rules, the Company
has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of February 29, 2008. This evaluation was carried out under the supervision and with the participation of management, including the
principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of the Companys disclosure controls and procedures were effective at a reasonable assurance
level as of February 29, 2008. However, because all disclosure procedures must rely to a significant degree on actions or decisions



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made by employees throughout the organization, such as reporting of material events, the Company and its reporting officers believe that they cannot provide
absolute assurance that all control issues and instances of fraud or errors and omissions, if any, within the Company will be detected. Limitations within any control system, including the Companys control system, include faulty judgments in
decision-making or simple errors or mistakes. In addition, controls can be circumvented by an individual, by collusion between two or more people, or by management override of the control. Because of these limitations, misstatements due to error or
fraud may occur and may not be detected.

There have been no changes in the Companys internal control over financial reporting that
occurred during the Companys most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We are
subject to various legal claims arising in the normal course of business. We are self-insured up to specified limits for certain types of claims, including product liability, and are fully self-insured for certain other types of claims, including
environmental, product recall, and patent infringement as part of the distribution agreement with Acuity Brands. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal
proceedings will not have a material adverse effect on our results of operations, financial position, or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if
unfavorable, could have a material adverse effect on our results of income, financial position, or cash flows in future periods. We establish reserves for legal claims when the costs associated with the claims become probable and can be reasonably
estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts reserved for such claims. However, we cannot make a meaningful estimate of actual costs to be incurred that could possibly be higher or lower
than the amounts reserved. See Item 3. Legal Proceedings in the Companys Annual Report on Form 10-K for the fiscal year ended August 31, 2007.



|Item 1a. | Risk Factors
|-------- | ------------

There have been no material
changes in the Companys risk factors from those disclosed in Part I, Item 1a. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended August 31, 2007.



|Item 6. | Exhibits
|------- | --------

Exhibits are listed on the Index to
Exhibits (page 31).



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##### Table of Contents

SIGNATURES

Pursuant to the requirements 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.



|                     |  |                                                                      
|-------------------- |  | ---------------------------------------------------------------------
|                     |  | Zep Inc. REGISTRANT                                                  
|                     | 
|DATE: April 14, 2008 |  | /s/ John K. Morgan                                                   
|                     |  | JOHN K. MORGAN                                                       
|                     |  | CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER                     
|                     | 
|DATE: April 14, 2008 |  | /s/ Mark R. Bachmann                                                 
|                     |  | MARK R. BACHMANN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER



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##### Table of Contents

INDEX TO EXHIBITS



|           |  |     |  |                                                                                                                                                                       |  |                                                                                                                                                       
|---------- |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT 3. |  | (a) |  | Restated Certificate of Incorporation of Zep Inc.                                                                                                                     |  | Reference is made to Exhibit 3.1 of registrants Form 8-K as filed with the Commission on October 26, 2007, which is incorporated herein by reference.
|           |  |     | 
|           |  | (b) |  | Amended and Restated By-Laws of Zep Inc.                                                                                                                              |  | Reference is made to Exhibit 3.2 of registrants Form 8-K as filed with the Commission on October 26, 2007, which is incorporated herein by reference.
|           |  |     | 
|EXHIBIT 31 |  | (a) |  | Certification of the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                |  | Filed with the Commission as part of this Form 10-Q.                                                                                                  
|           |  |     | 
|           |  | (b) |  | Certification of the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                |  | Filed with the Commission as part of this Form 10-Q.                                                                                                  
|           |  |     | 
|EXHIBIT 32 |  | (a) |  | Certification of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  | Filed with the Commission as part of this Form 10-Q.                                                                                                  
|           |  |     | 
|           |  | (b) |  | Certification of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  | Filed with the Commission as part of this Form 10-Q.                                                                                                  



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