10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x	For the quarterly period ended		December 27, 2008
OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o	For the transition period from					to
	Commission file number		1-367
THE L. S. STARRETT COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS					04-1866480
(State or other jurisdiction of incorporation or organization)					(I.R.S. Employer Identification No.)
121 CRESCENT STREET, ATHOL, MASSACHUSETTS							01331-1915
(Address of principal executive offices)							(Zip Code)
Registrant's telephone number, including area code				978-249-3551
Former name, address and fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x    NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act, (Check One):
Large Accelerated Filer o    Accelerated Filer x    Non-Accelerated Filer o    Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o    NO x
Common Shares outstanding as of		January 31, 2009
Class A Common Shares		5,744,988
Class B Common Shares		879,135

1

THE L. S. STARRETT COMPANY

CONTENTS

	Page No.
Part I.                      Financial Information:
Item 1.                      Financial Statements
Consolidated Statements of Operations – thirteen weeks and twenty-six weeks ended December 27, 2008 and December 29, 2007 (unaudited)	3
Consolidated Statements of Cash Flows – thirteen weeks and twenty-six weeks ended December 27, 2008 and December 29, 2007 (unaudited)	4
Consolidated Balance Sheets – December 27, 2008 (unaudited) and June 28, 2008	5
Consolidated Statements of Stockholders' Equity - twenty-six weeks ended December 27, 2008 and December 29, 2007 (unaudited)	6
Notes to Consolidated Financial Statements	7-10
Item 2.                      Management's Discussion and Analysis of FinancialCondition and Results of Operations	11-16
Item 3.                      Quantitative and Qualitative Disclosures AboutMarket Risk	16
Item 4.                      Controls and Procedures	16
Part II.                      Other information:
Item 1A.                      Risk Factors	16-18
Item 2.                      Unregistered Sales of Equity Securities and Use ofProceeds	18
Item 4.                      Submission of Matters to a Vote of Security Holders	19
Item 6.                      Exhibits	19
SIGNATURES	19
EXHIBIT INDEX	20

2

Part I. Financial Information

Item 1. Financial Statements

THE L. S. STARRETT COMPANY

Consolidated Statements of Operations

(in thousands of dollars except per share data)(unaudited)

	13 Weeks Ended						26 Weeks Ended
	12/27/08			12/29/07			12/27/08			12/29/07
Net sales	$	54,081		$	62,436		$	122,066		$	121,986
Cost of goods sold		(37,766	)		(42,892	)		(84,558	)		(83,888	)
Selling and general expense		(15,493	)		(15,766	)		(32,991	)		(30,469	)
Other income (expense)		820			2,162			1,355			1,896
Earnings before income taxes		1,642			5,940			5,872			9,525
Income tax expense		507			2,517			2,114			3,772
Net earnings	$	1,135		$	3,423		$	3,758		$	5,753
Basic and diluted earnings per share	$	.17		$	.52		$	.57		$	.87
Average outstanding shares used in per share calculations (in thousands):
Basic		6,617			6,587			6,617			6,591
Diluted		6,620			6,596			6,624			6,601
Dividends per share	$	.12		$	.20		$	.24		$	.30

See Notes to Consolidated Financial Statements

3

THE L. S. STARRETT COMPANY

Consolidated Statements of Cash Flows

(in thousands of dollars)(unaudited)

	13 Weeks Ended						26 Weeks Ended
	12/27/08			12/29/07			12/27/08			12/29/07
Cash flows from operating activities:
Net earnings	$	1,135		$	3,423		$	3,758		$	5,753
Non-cash items included:
Gain from sale of real estate		-			(1,703	)		-			(1,703	)
Depreciation		2,150			2,465			4,506			4,839
Impaired assets		-			95			-			95
Amortization		312			321			624			616
Net long-term tax payable		123			-			224			-
Deferred taxes		(639	)		660			(562	)		1,107
Unrealized transaction (gains) losses		1,319			(758	)		1,295			(556	)
Retirement benefits		(479	)		(922	)		(989	)		(1,743	)
Cumulative effect of adopting FIN48		-			-			-			(313	)
Working capital changes:
Receivables		3,231			2,384			1,000			(730	)
Inventories		(6,745	)		2,628			(11,109	)		4,812
Other current assets		(144	)		(239	)		(761	)		668
Other current liabilities		(2,980	)		1,117			(3,175	)		1,044
Prepaid pension cost and other		854			303			1,832			648
Net cash (used in) provided by operating activities		(1,863	)		9,774			(3,357	)		14,537
Cash flows (used in) provided by investing activities:
Additions to plant and equipment		(2,457	)		(1,701	)		(5,425	)		(4,098	)
Proceeds from sale of real estate		-			2,416			-			2,416
Decrease (increase) in investments		3,384			(9,090	)		6,683			(9,850	)
Purchase of Kinemetric Engineering		(270	)		-			(270	)		(2,060	)
Net cash provided by (used in) investing activities		657			(8,375	)		988			(13,592	)
Cash flows (used in) provided by financing activities:
Proceeds from short-term borrowings		5,610			2,265			9,646			4,481
Short-term debt repayments		(3,945	)		(1,567	)		(4,365	)		(3,711	)
Long-term debt repayments		(56	)		(109	)		(190	)		(224	)
Proceeds from common stock issued		176			157			332			268
Treasury shares purchased		(188	)		-			(188	)		(317	)
Dividends		(795	)		(1,318	)		(1,589	)		(1,978	)
Net cash provided by (used in) financing activities		802			(572	)		3,646			(1,481	)
Effect of exchange rate changes on cash		(1,146	)		136			(1,660	)		166
Net (decrease) increase in cash		(1,550	)		963			(383	)		(370	)
Cash, beginning of period		7,682			6,375			6,515			7,708
Cash, end of period	$	6,132		$	7,338		$	6,132		$	7,338

See Notes to Consolidated Financial Statements

4

THE L. S. STARRETT COMPANY

Consolidated Balance Sheets

(in thousands of dollars except share data)

	Dec. 27 2008 (unaudited)			June 28 2008
ASSETS
Current assets:
Cash	$	6,132		$	6,515
Investments		10,295			19,806
Accounts receivable (less allowance for doubtful accounts of $664 and $701)		30,797			39,627
Inventories:
Raw materials and supplies		19,728			15,104
Goods in process and finished parts		17,404			16,653
Finished goods		26,146			29,400
		63,278			61,157
Current deferred income tax asset		5,631			5,996
Prepaid expenses, taxes and other current assets		5,397			5,535
Total current assets		121,530			138,636
Property, plant and equipment, at cost (less accumulated depreciation of $116,522 and $131,386)		55,566			60,945
Property held for sale		1,912			1,912
Intangible assets (less accumulated amortization of $3,101 and $2,477)		3,140			3,764
Goodwill		6,302			6,032
Pension asset		35,335			34,643
Other assets		291			1,877
Long-term taxes receivable		2,905			2,476
Total assets	$	226,981		$	250,285
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities	$	9,080		$	4,121
Accounts payable and accrued expenses		12,961			18,041
Accrued salaries and wages		5,380			6,907
Total current liabilities		27,421			29,069
Long-term taxes payable		8,551			8,522
Deferred income taxes		5,815			6,312
Long-term debt		5,334			5,834
Postretirement benefit liability		12,682			13,775
Total liabilities		59,803			63,512
Stockholders' equity:
Class A Common $1 par (20,000,000 shrs. authorized) 5,739,388 outstanding on 12/27/08, 5,708,100 outstanding on 6/28/08		5,739			5,708
Class B Common $1 par (10,000,000 shrs. authorized) 879,135 outstanding on 12/27/08, 906,065 outstanding on 6/28/08		879			906
Additional paid-in capital		49,784			49,613
Retained earnings reinvested and employed in the business		136,278			134,109
Accumulated other comprehensive loss		(25,502	)		(3,563	)
Total stockholders' equity		167,178			186,773
Total liabilities and stockholders’ equity	$	226,981		$	250,285

See Notes to Consolidated Financial Statements

5

THE L. S. STARRETT COMPANY

Consolidated Statements of Stockholders' Equity

For the Twenty-six Weeks Ended December 27, 2008 and December 29, 2007

(in thousands of dollars except per share data)

(unaudited)

	Common Stock  Out-standing ($1 Par)
	Class A			Class B			Addi- tional Paid-in Capital			Retained Earnings			Accumulated Other Com-prehensive Loss			Total
Balance June 30, 2007	$	5,632		$	963		$	49,282		$	127,023		$	(5,786	)	$	177,114
Comprehensive income (loss):
Net earnings											5,753						5,753
Unrealized net loss on investments andswap agreement														(36	)		(36	)
Translation gain, net														4,243			4,243
Total comprehensive income																	9,960
Tax adjustment for FIN 48											(313	)					(313	)
Dividends ($.30 per share)											(1,978	)					(1,978	)
Treasury shares:
Purchased		(20	)					(297	)								(317	)
Issued		10						177									187
Issuance of stock under ESPP					5			99									104
Conversion		44			(44	)											-
Balance December 29, 2007	$	5,666		$	924		$	49,261		$	130,485		$	(1,579	)	$	184,757
Balance June 28, 2008	$	5,708		$	906		$	49,613		$	134,109		$	(3,563	)	$	186,773
Comprehensive income (loss):
Net earnings											3,758						3,758
Unrealized net gain on investments andswap agreement														229			229
Translation loss, net														(22,168	)		(22,168	)
Total comprehensive loss																	(18,181	)
Dividends ($.24 per share)											(1,589	)					(1,589	)
Treasury shares:
Purchased		(15	)					(173	)								(188	)
Issued		15						268									283
Issuance of stock under ESPP					4			76									80
Conversion		31			(31	)											-
Balance December 27, 2008	$	5,739		$	879		$	49,784		$	136,278		$	(25,502	)	$	167,178
Cumulative Balance:
Translation loss														(21,562	)
Unrealized loss on investments and swapagreements														(112	)
Amounts not recognized as a component of net periodic benefit cost														(3,828	)
													$	(25,502	)

See Notes to Consolidated Financial Statements

6

THE L. S. STARRETT COMPANY

Notes to Consolidated Financial Statements

In the opinion of management, the accompanying financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of December 27, 2008 and June 28, 2008; the results of operations and cash flows for the thirteen and twenty-six weeks ended December 27, 2008 and December 29, 2007; and changes in stockholders' equity for the twenty-six weeks ended December 27, 2008 and December 29, 2007.

The Company follows the same accounting policies in the preparation of interim statements as described in the Company's Annual Report filed on Form 10-K for the year ended June 28, 2008, and these financial statements should be read in conjunction with said Annual Report on Form 10-K. Note that significant foreign locations are reported on a one month lag.

Included in investments at December 27, 2008 is $1.8 million of AAA rated Puerto Rico debt obligations that have maturities greater than one year but carry the benefit of possibly reducing repatriation taxes. These investments represent “core cash” and are part of the Company’s overall cash management and liquidity program and, under SFAS 115, are considered “available for sale.” The investments themselves are highly liquid, carry no early redemption penalties, and are not designated for acquiring non-current assets. Cash and investments held in foreign locations amounted to $11.4 million and $18.8 million at December 27, 2008 and June 28, 2008, respectively. The other significant component of investments at December 27, 2008 is $7.1 million of investments in certificates of deposit which are carried at cost.

On October 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“Statement No. 157”). Statement No. 157 defines and establishes a framework for measuring fair value and expands disclosures about fair value instruments. In accordance with Statement No. 157, the Company has categorized its financial assets, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The Company does not have any financial liabilities that are required to be measured at fair value on a recurring basis. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets recorded on the balance sheets are categorized based on the inputs to the valuation techniques as follows:

-   Level 1 – Financial assets whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market which the company has the ability to access at the measurement date (examples include active exchange-traded equity securities and most U.S. Government and agency securities).

-   Level 2 – Financial assets whose value are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. The Company does not currently have any Level 2 financial assets.

-   Level 3 – Financial assets whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset. The Company does not currently have any Level 3 financial assets.

As of December 27, 2008, the Company’s Level 1 financial assets were as follows:

	Level 1
Money Market Funds	$	1,462
Certificates of Deposits		7,082
International Bonds		1,751
	$	10,295

The Company has determined that a triggering event has occurred during the second quarter of fiscal 2009 relating to the $5.3 million of goodwill on acquisition of Tru-Stone. This event is represented by a downturn in quarterly sales and the outlook for their markets served. In accordance with FAS 142, Goodwill and Other Intangibles, the Company performed the step one evaluation on the carrying value and tangible book value of Tru-Stone, using a

7

discounted cash flow methodology, which resulted in an implied fair value greater than the carrying value. Further, the Company’s stock price has been trading below its book value and tangible book value for over four consecutive quarters. The Company attributes this low stock price to both the overall market conditions and company specific factors, including low trading volume of the Company’s stock. On this basis, the Company did not consider it necessary to perform a step one analysis on the other remaining reporting unit with goodwill.

Accounts payable and accrued expenses at December 27, 2008 and June 28, 2008 consisted primarily of accounts payable ($5.8 million and $9.0 million), accrued benefits ($1.2 million and $1.1 million), accrued taxes other than income ($.8 million and $2.1 million), and other accrued expenses ($5.1 million and $5.8 million).

Other income (expense) is comprised of the following (in thousands):

	Thirteen Weeks Ended December						Twenty-six Weeks Ended December
	2008			2007			2008			2007
Interest income	$	224		$	423		$	541		$	734
Interest expense and commitment fees		(214	)		(198	)		(396	)		(453	)
Realized and unrealized exchange gains		668			278			1,098			79
Gains on sale of real estate		-			1,703			-			1,703
Other		142			(44	)		112			(167	)
	$	820		$	2,162		$	1,355		$	1,896

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), at the beginning of fiscal year 2008. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. As a result of implementing FIN No. 48, the Company recognized a cumulative effect adjustment of $.3 million to decrease the July 1, 2007 retained earnings balance and increase long-term tax payable. Also in connection with this implementation the Company has reclassified $2.9 million of unrecognized tax benefits into a long-term taxes receivable representing the corollary effect of transfer pricing competent authority adjustments.

The Company is subject to U.S. federal income tax and various state, local and international income taxes in numerous jurisdictions. The Company’s domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files.

The Company has substantially concluded all U.S. federal income tax matters for years through fiscal 2003. Currently, the Company does not have any income tax audits in progress at the Federal level, or in the numerous states, local and international jurisdictions in which it operates. In international jurisdictions including Argentina, Australia, Brazil, Canada, China, UK, Germany, New Zealand, and Mexico, which comprise a significant portion of the Company’s operations, the years that may be examined vary, with the earliest year being 2004 (except for Brazil, which has 1997-2006 still open for examination).

The Company recognizes interest expense related to income tax matters in income tax expense. The Company has accrued $.1 million of interest as of June 28, 2008. The amount did not change significantly during the six months ended December 27, 2008.

The Company has identified no uncertain tax position for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

8

Net periodic benefit costs (benefits) for the Company's defined benefit pension plans consist of the following (in thousands):

	Thirteen Weeks Ended December						Twenty-six Weeks Ended December
	2008			2007			2008			2007
Service cost	$	556		$	555		$	1,129		$	1,199
Interest cost		1,710			1,658			3,494			3,503
Expected return on plan assets		(2,561	)		(2,959	)		(5,197	)		(5,909	)
Amort. of prior service cost		105			112			215			224
Amort. of unrecognized (gain) loss		(3	)		(2	)		(6	)		(4	)
	$	(193	)	$	(636	)	$	(365	)	$	(987	)

Net periodic benefit costs (benefits) for the Company's postretirement medical plan consists of the following (in thousands):

	Thirteen Weeks Ended December						Twenty-six Weeks Ended December
	2008			2007			2008			2007
Service cost	$	88		$	97		$	176		$	197
Interest cost		177			191			354			371
Amort. of prior service cost		(226	)		(226	)		(452	)		(453	)
Amort. of unrecognized loss		-			35			-			57
	$	39		$	97		$	78		$	172

Approximately 56% of all inventories are valued on the LIFO method. LIFO inventories were $21.6 million and $17.9 million, respectively, at December 27, 2008 and June 28, 2008, such amounts being approximately $32.3 and $27.5 million less than if determined on a FIFO basis. The Company has not realized any material LIFO layer liquidation profits in the periods presented.

Long-term debt is comprised of the following (in thousands):

	December 27, 2008		June 28, 2008
Reducing revolver	$	7,200	$	7,200
Capitalized lease obligations payable in Brazilian currency due 2009-2011, 13.3%-23.1%		897		1,569
	$	8,097	$	8,769
Less current portion		2,763		2,935
	$	5,334	$	5,834

Current notes payable, primarily in Brazilian currency, carry interest at up to 23.1%. The average rate for the quarter ended December 27, 2008 was approximately 19.4%.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. FAS 157 was initially effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2. This FSP permits a delay in the effective date of FAS 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset when the Market for That Asset is Not Active,” which clarifies the application of FAS 157 for financial assets in a market that is not active.

9

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under generally accepted accounting principles in the United States (“U.S. GAAP”). SFAS 159 has been adopted by the Company beginning in the first quarter of fiscal 2009, and the Company has determined SFAS 159 has no material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquiror of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning December 15, 2008, which is October 1, 2009 for the Company. The Company is currently evaluating the impact of the provisions of SFAS 141R on its consolidated financial statements.

In December 2008, the FASB issued FSP FAS 132R-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets”, which amends FASB Statement 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. Beginning in fiscal years ending after December 15, 2009, employers will be required to provide more transparency about the assets in their postretirement benefit plans, including defined benefit pension plans. FSP FAS 132R-1 was issued in response to users’ concerns that employers’ financial statements do not provide adequate transparency about the types of assets and associated risks in employers’ postretirement plans. In current disclosures of the major categories of plan assets, many employers provide information about only four asset categories: equity, debt, real estate, and other investments. For many employers, the “other investment” category has increased to include a significant percentage of plan assets. Users indicate that such disclosure is not sufficiently specific to permit evaluation of the nature and risks of assets held as investments.

FSP FAS 132R-1’s amended disclosure requirements about plan assets are principles-based. The objectives of the disclosures are to provide users with an understanding of the following:

-   How investment decisions are made, including factors necessary to understanding investment policies and strategies

-   The major categories of plan assets

-   The inputs and valuation techniques used to measure the fair value of plan assets

-   The effect of fair value measurements using significant unobservable inputs (Level 3 measurements in Statement 157 on changes in plan assets for the period)

-   Significant concentrations of risk within plan assets

Employers are required to consider these overall disclosure objectives in providing the detailed disclosures required by Statement 132R, as amended by FSP FAS 132R-1.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”. This statement improves the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require; the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company does not believe that SFAS No. 160 will have an impact on its consolidated financial statements.

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Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

QUARTERS ENDED DECEMBER 27, 2008 AND DECEMBER 29, 2007

Overview

The Company experienced the severity of the global economic recession during the quarter. Net income was $1.1 million, or $.17 per basic and diluted share, in the second quarter of fiscal 2009 (fiscal 2009 quarter) compared to net income of $3.4 million, or $.52 per basic and diluted share, in the second quarter of fiscal 2008 (fiscal 2008 quarter). The quarter to quarter comparison was negatively impacted by lower sales volume and the strengthening of the U.S. dollar upon consolidation of international results. This represents a decrease in net income of $2.3 million comprised of decreases in gross margin of $3.2 million and other income of $1.3 million. This was offset by a decrease of $.3 million in selling, general and administrative costs, and a decrease in income tax expense of $2.0 million. These items are discussed in more detail below.

Net Sales

Net sales for the fiscal 2009 quarter were $54.1 million, a decrease of 13% compared to the fiscal 2008 quarter. North American sales decreased $3.9 million or 13%, while international sales excluding North America decreased $4.4 million or 18% (1% in local currency). The decrease in North American sales is related to the widening of the recession to the manufacturing sector in the U.S., lower Evans Rule sales to the construction sector, and decreased sales in Canada. It is likely that the Company’s results will continue to be impacted by the current global financial crises.

The decrease in international sales is driven by the weakening of the Brazilian Real, British Pound, and Australian Dollar against the U.S. Dollar, partially offset by greater penetration into the Chinese markets.

Earnings before income taxes

The fiscal 2009 quarter's earnings before income taxes of $1.6 million represents a decrease of earnings before income taxes of $4.3 million from the fiscal 2008 quarter’s earnings before income taxes of $5.9 million. Approximately $3.2 million of the decrease is at the gross margin line. The gross margin percentage decreased from 31.3% in the fiscal 2008 quarter to 30.2% in the fiscal 2009 quarter. The decrease in gross margin is primarily a result of sales decreases quarter over quarter, lower overhead absorption ($.2 million) at both domestic and international operations due to this lower sales dollar volume.

Selling and general expense is decreased $.3 million. However, as a percentage of sales, selling and general expenses increased from 25.2% in the fiscal 2008 quarter to 28.6% in the fiscal 2009 quarter. The decrease in selling and general expense is primarily a result of reduced accruals for incentives for the fiscal 2009 quarter ($.2 million), and a decrease in professional fees ($.3 million).

The fiscal 2008 quarter includes in other income a one-time gain of $1.7 million from the sale of the Company’s Glendale, Arizona facility on October 19, 2007 for proceeds of $2.4 million.

Income Taxes

The effective income tax rate is 30.9% in the fiscal 2009 quarter versus 42.4% for the fiscal 2008 quarter. Both rates reflect a combined federal, state and foreign rate adjusted for permanent book/tax differences, the most significant of which is the effect of the deduction allowable for the Brazilian dividend paid in the second quarter of fiscal 2008 and the dividend paid in the third quarter of fiscal 2007. The change in the effective rate percentage reflects the increased impact of the Brazilian dividend due to lower forecasted taxable income.

No changes in valuation allowances relating to carryforwards for foreign NOL’s, foreign tax credits and certain state NOL’s are anticipated for fiscal 2009 at this time other than reversals relating to realization of NOL benefits for certain foreign subsidiaries. The Company continues to believe it is more likely than not that it will be able to utilize its tax operating loss carryforward assets reflected on the balance sheet.

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Net earnings per share

As a result of the above factors, the Company had basic and diluted net earnings of $.17 per share in the fiscal 2009 quarter compared to a basic and diluted net earnings per share of $.52 in the fiscal 2008 quarter, a decrease of $.35 per share. Included in the $.52 per share for the fiscal 2008 quarter is $.15 per share related to the sale of the Glendale facility.

SIX MONTH PERIODS ENDED DECEMBER 27, 2008 AND DECEMBER 29, 2007

Overview

The Company had net income of $3.8 million, or $.57 per basic and diluted share in the first six months of fiscal 2009, compared to net income of $5.8 million, or $.87 per basic and diluted share in the first six months of fiscal 2008. This represents a decrease in net income of $2.0 million comprised of a decrease in gross margin of $.6 million, an increase in selling, general and administrative expenses of $2.5 million and a decrease in other income of $.5 million, offset by a decrease in income tax expense of $1.7 million.

Net Sales

Net sales for the first six months of fiscal 2009 were $122.1 million, up $.1 million compared to the first six months of fiscal 2008. Domestic sales were flat, while international sales increased 8% (7% increase in local currency). North American sales reflect flat U.S., Canadian and Mexican demand and lower Evans Rule sales to Sears, partially offset by the acquisition of Kinemetrics.

The increase in international sales is driven by strong sales in the Brazilian domestic markets and continued expansion in global markets, including Eastern Europe, the Middle East and China, offset by the weakening of the Brazilian Real and British Pound against the U.S. Dollar.

Earnings before income taxes

The earnings before income taxes for the first six months of fiscal 2009 were $5.9 million compared to $9.5 million of earnings before income taxes for the first six months of fiscal 2008.

This represents a decrease of earnings before income taxes of $3.6 million. Approximately $.6 million of this decrease is at the gross margin line. The gross margin percentage decreased from 31.2% in the first six months of fiscal 2008 to 30.7% in the first six months of fiscal 2009. The decrease in gross margin reflects lower sales from period to period and decreases of fixed overhead absorption at domestic manufacturing locations as a result of less capacity utilization, partially offset by the reduction of cost of sales at the Evans Rule Division.

This decrease in gross margin is accompanied by an increase of $2.5 million in selling and general expense from the first six months of fiscal 2008 to the first six months of fiscal 2009. The increase in selling and general expense is primarily a result of accruals for incentives for the first six months of fiscal 2009 ($.2 million), higher commissions due to higher sales ($.1 million), increases in computer maintenance and support ($.2 million) and additional salaries related primarily to sales and marketing ($.7 million). Finally, higher foreign exchange gains($1.0 million) during the first six months of fiscal 2009 and a one-time gain of $1.7 million from the sale of the Company’s Glendale, Arizona facility during the first six months of fiscal 2008, primarily contributed to a $.5 million decrease in other income.

Income Taxes

The effective income tax rate is a 36.0% provision for the first six months of fiscal 2009 versus a 39.6% tax rate for the first six months of fiscal 2008. Both rates reflect a combined federal, state and foreign worldwide rate adjusted for permanent book/tax differences, the most significant of which is the deduction allowable for the Brazilian dividend paid in December 2008 and December 2007. The change in the effective rate percentage primarily reflects the larger impact of the Brazilian dividend on lower anticipated earnings for fiscal 2009. No changes in valuation allowances relating to carryforwards for foreign NOL’s, foreign tax credit carryforwards and certain state NOL’s are anticipated for fiscal 2009 at this time other than reversals relating to realization of NOL benefits for certain foreign subsidiaries.

The Company continues to believe it is more likely than not that it will be able to utilize its tax operating loss carryforward of approximately $2.5 million reflected on the balance sheet.

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Net earnings per share

As a result of the above factors, the Company had basic and diluted net earnings per share for the first six months of fiscal 2009 of $.57 per share compared to an earnings per share of $.87 in the first six months of fiscal 2008, a decrease of $.30 per share. Included in the $.87 per share for the first six months of fiscal 2008 is $.15 per share related to the sale of the Glendale facility.

LIQUIDITY AND CAPITAL RESOURCES

	13 Weeks Ended						26 Weeks Ended
	12/27/08			12/29/07			12/27/08			12/29/07
Cash flows (in thousands)
Cash (used in) provided by operations		(1,863	)		9,774			(3,357	)		14,537
Cash provided from (used in) investing activities		657			(8,375	)		988			(13,592	)
Cash provided from (used in) financing activities		802			(572	)		3,646			(1,481	)

The fiscal 2009 quarter showed a use of cash in operations of $1.9 million compared to $9.8 million of cash generated in operations in the fiscal 2008 quarter. This decrease is driven by lower net earnings, an increase in inventories and a decrease in current liabilities, partially offset by a reduction in receivables.

For the first six months of fiscal 2009, there was a $3.4 million use of cash in operations compared to $14.5 million of cash generated in the same six month period a year ago. This decrease is driven by lower net earnings, an increase in inventories and an decrease in current liabilities, partially offset by a reduction in receivables.

It is anticipated that inventory levels will decrease over the next quarter as usage exceeds incoming receipts.

The Company’s investing activities for the fiscal 2009 quarter and six month period consist of expenditures for plant and equipment, the use of short-term investments and an earnout related to the purchase of Kinemetrics. Expenditures for plant and equipment were relatively consistent when comparing the fiscal 2009 quarter to the same period a year ago. Such expenditures for the six month period increased compared to the same period a year ago as replacement equipment was required at certain plant locations. The proceeds from the sale of the Glendale distribution facility is included in the fiscal 2008 quarter and the first six months of fiscal 2008. The purchase of Kinemetrics was completed in the first quarter of fiscal 2008 and is included in the prior six month period. The amount included in the fiscal 2009 quarter and six month period represents additional purchase price relating to an earn-out provision for the Kinemetrics acquisition.

Cash flows related to financing activities are primarily the takedown of the line of credit, the payment of dividends and repayments of debt.

The Company maintains a defined benefit pension plan which as of December 27, 2008 was overfunded for accounting and for funding purposes although the amount of this overfunding has decreased dramatically since June 28, 2008 due to a significant decline in the U.S. stock market. Due to the continued overfunded status however, it is not anticipated that the Company will be required to provide any funding for this plan during fiscal 2009.

Liquidity and credit arrangements

The Company believes it maintains sufficient liquidity and has the resources to fund its operations in the near term. If the Company is unable to maintain consistent profitability, additional steps will have to be taken in order to maintain liquidity, including plant consolidations and work force and dividend reductions (see Strategic and Other Activities below). In addition to its cash and investments, the Company maintains a $10 million line of credit, of which, as of December 27, 2008, $5.0 million was taken down for short-term working capital purposes and $1.0 million is being utilized in the form of standby letters of credit for insurance purposes. This line of credit will terminate as of April 28, 2009. It is expected to be renewed prior to that date. As certain investments are redeemed at maturity in January and February 2009, it is expected that the takedown related to the line of credit will be repaid. As of December 27, 2008, the Company is in compliance with all debt covenants related to its Reducing Revolver and its Line of Credit Agreement. Although the credit line is not currently collateralized, it is possible, based on the Company's financial performance, that in the future the Company will have to provide collateral in order to maintain the credit agreement. The Company has a working capital ratio of 4.4 to one as of December 27, 2008 and 4.8 to one as of June 28, 2008.

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STRATEGIC AND OTHER ACTIVITIES

Globalization has had a profound impact on product offerings and buying behaviors of industry and consumers in North America and around the world, forcing the Company to adapt to this new, highly competitive business environment. The Company continuously evaluates most all aspects of its business, aiming for new world-class ideas to set itself apart from its competition.

The strategic focus has shifted from manufacturing locations to global brand building through product portfolio and distribution channel management while reducing costs through lean manufacturing, plant consolidations, global sourcing and improved logistics.

The execution of these strategic initiatives has expanded the Company’s manufacturing and distribution in developing economies which has increased its international sales revenues to approximately 45% of its consolidated sales.

On September 21, 2006, the Company sold its Alum Bank, PA level manufacturing plant and relocated the manufacturing to the Dominican Republic, where production began in fiscal 2005. The tape measure production of the Evans Rule Division facilities in Puerto Rico and Charleston, SC has been transferred to the Dominican Republic. The Company vacated and plans to sell its Evans Rule facility in North Charleston, SC. The Company’s goal is to achieve labor savings and maintain margins while satisfying the demands of its customers for lower prices. The Company has closed three warehouses, the most recent being the Glendale, AZ facility, which was sold in fiscal 2008. Also during fiscal 2006, the Company began a lean manufacturing initiative in its Athol, MA facility, which has reduced costs over time. This initiative has continued through fiscal 2007 and 2008 and has continued in fiscal 2009.

The Tru-Stone acquisition in April 2006 represented a strategic acquisition for the Company in that it provides an enhancement of the Company’s granite surface plate capabilities. Profit margins for the Company’s standard plate business have improved as the Company’s existing granite surface plate facility was consolidated into Tru-Stone, where average gross margins have been higher. Along the same line, the Kinemetric Engineering acquisition in July 2007 represented another strategic acquisition in the field of precision video-based metrology which, when combined with the Company’s existing optical projection line, has provided a very comprehensive product offering.

If the Company continues to be impacted by the worldwide recession, there will likely be layoffs, shortened hours per week and possible temporary idling of manufacturing plants to reduce costs in the short-term.

INFLATION

The Company has experienced modest inflation relative to its material cost, much of which cannot be passed on to the customer through increased prices.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any material off-balance sheet arrangements as defined under the Securities and Exchange Commission’s rules.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The first note to the Company's Consolidated Financial Statements included in the Form 10-K for the year ended June 28, 2008 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements.

Judgments, assumptions, and estimates are used for, but not limited to, the allowance for doubtful accounts receivable and returned goods; inventory allowances; income tax reserves; employee turnover, discount, and return rates used to calculate pension obligations; and normal expense accruals for such things as workers compensation and employee medical expenses.

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Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may differ from those estimates, and such differences may be material to the Company’s Consolidated Financial Statements. The following sections describe the Company’s critical accounting policies.

Sales of merchandise and freight billed to customers are recognized when title passes and all substantial risks of ownership change, which occurs either upon shipment or upon delivery based upon contractual terms. Sales are net of provision for cash discounts, returns, customer discounts (such as volume or trade discounts), cooperative advertising and other sales related discounts.

The allowance for doubtful accounts and sales returns of $1.0 million and $1.2 million as of December 27, 2008 and June 28, 2008, respectively, is based on the Company’s assessment of the collectability of specific customer accounts, the aging of the Company’s accounts receivable and trends in product returns. While the Company believes that the allowance for doubtful accounts and sales returns is adequate, if there is a deterioration of a major customer’s credit worthiness, actual defaults are higher than the Company’s previous experience, or actual future returns do not reflect historical trends, the estimates of the recoverability of the amounts due the Company, the Company could be adversely affected.

Inventory purchases and commitments are based upon future demand forecasts. If there is a sudden and significant decrease in demand for our products or there is a higher risk of inventory obsolescence because of rapidly changing technology and requirements, we may be required to increase our inventory reserve and, as a result, our gross profit margin could be adversely affected.

The Company generally values property, plant and equipment (PP&E) at historical cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment, such as plant closures, are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company continually reviews for such impairment and believes that PP&E is being carried at its appropriate value.

The Company assesses the fair value of its goodwill, generally based upon a discounted cash flow methodology as of fiscal year end or when other circumstances would indicate potential impairment. The discounted cash flows are estimated utilizing various assumptions regarding future revenue and expenses, working capital, terminal value, and market discount rates. If the carrying amount of the goodwill is greater than the fair value, goodwill impairment may be present. An impairment charge is recognized to the extent the recorded goodwill exceeds the implied fair value of goodwill.

The Company has determined that a triggering event has occurred during the second quarter of fiscal 2009 relating to the $5.3 million of goodwill on acquisition of Tru-Stone. This event is represented by a downturn in quarterly sales and the outlook for their markets served. In accordance with FAS 142, Goodwill and Other Intangibles, the Company performed the step one evaluation on the carrying value and tangible book value of Tru-Stone, using a discounted cash flow methodology, which resulted in an implied fair value greater than the carrying value. Continued unfavorable economic conditions may continue to have an adverse impact on the business and potentially result in goodwill impairment in the future. Further, the Company’s stock price has been trading below its book value and tangible book value for over four consecutive quarters. The Company attributes this low stock price to both the overall market conditions and company specific factors, including low trading volume of the Company’s stock. On this basis, the Company did not consider it necessary to perform a step one analysis on the other remaining reporting unit with goodwill.

Accounting for income taxes requires estimates of our future tax liabilities. Due to timing differences in the recognition of items included in income for accounting and tax purposes, deferred tax assets or liabilities are recorded to reflect the impact arising from these differences on future tax payments. With respect to recorded tax assets, we assess the likelihood that the asset will be realized. If realization is in doubt because of uncertainty regarding future profitability or enacted tax rates, we provide a valuation allowance related to the asset. Tax reserves are also established to cover risks associated with activities or transactions that may be at risk for additional taxes. Should any significant changes in the tax law or our estimate of the necessary valuation allowances or reserves occur, we would record the impact of the change, which could have a material effect on our financial position or results of operations.

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Pension and postretirement medical costs and obligations are dependent on assumptions used by our actuaries in calculating such amounts. These assumptions include discount rates, healthcare cost trends, inflation, salary growth, long-term return on plan assets, retirement rates, mortality rates, and other factors. These assumptions are made based on a combination of external market factors, actual historical experience, long-term trend analysis, and an analysis of the assumptions being used by other companies with similar plans. Actual results that differ from our assumptions are accumulated and amortized over future periods. Significant differences in actual experience or significant changes in assumptions would affect our pension and other postretirement benefit costs and obligations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is the potential change in a financial instrument’s value caused by fluctuations in interest and currency exchange rates, and equity and commodity prices. The Company's operating activities expose it to risks that are continually monitored, evaluated, and managed. Proper management of these risks helps reduce the likelihood of earnings volatility. At December 27, 2008, the Company was party to an interest rate swap agreement, which is more fully described in the Company’s fiscal 2008 Annual Report on Form 10-K. The Company does engage in limited hedging activities to minimize the impact of foreign currency fluctuations. Net foreign monetary assets are approximately $12.6 million.

A 10% change in interest rates would not have a significant impact on the aggregate net fair value of the Company's interest rate sensitive financial instruments (primarily variable rate investments of $8.7 million and debt of $7.2 million at December 27, 2008) or the cash flows or future earnings associated with those financial instruments. A 10% change in interest rates would have an insignificant impact the fair value of the Company's fixed rate investments of approximately $6.9 million.

Item 4. CONTROLS AND PROCEDURES

The Company's management, under the supervision and with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, has evaluated the Company's disclosure controls and procedures as of December 27, 2008, and they have concluded that our disclosure controls and procedures were effective as of such date. All information required to be filed in this report was recorded, processed, summarized and reported within the time period required by the rules and regulations of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains forward-looking statements about the Company’s business, competition, sales, expenditures, foreign operations, plans for reorganization, interest rate sensitivity, debt service, liquidity and capital resources, and other operating and capital requirements. In addition, forward-looking statements may be included in future Company documents and in oral statements by Company representatives to security analysts and investors. The Company is subject to risks that could cause actual events to vary materially from such forward-looking statements, including the following risk factors:

Risks Related to the Economy: The Company’s results of operations are materially affected by the conditions in the global economy. The current global financial crisis, which began last year, has deteriorated further and has caused extreme volatility and disruptions in the capital and credit markets. U.S. and foreign economies have experienced and continue to experience significant declines in employment, household wealth and lending. Businesses, including the Company and its customers, have faced and may continue to face weakened demand for their products and services, difficulty obtaining access to financing, increased funding costs, and barriers to expanding operations. Economic and market conditions may worsen and could negatively impact the Company’s results of operations.

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Risks Related to Reorganization: The Company continues to evaluate plans to consolidate and reorganize some of its manufacturing and distribution operations. There can be no assurance that the Company will be successful in these efforts or that any consolidation or reorganization will result in revenue increases or cost savings to the Company. The implementation of these reorganization measures may disrupt the Company’s manufacturing and distribution activities, could adversely affect operations, and could result in asset impairment charges and other costs that will be recognized if and when reorganization or restructuring plans are implemented or obligations are incurred. This has occurred with the Company’s move to the Dominican Republic from South Carolina. Indeed, the relocation, restructuring and closure of our Evans Rule Division’s Charleston, South Carolina facility and start up of that Division’s Dominican Republic operations was a factor contributing to the Company’s fiscal 2006 loss. If the Company is unable to maintain consistent profitability, additional steps will have to be taken, including further plant consolidations and workforce and dividend reductions.

Risks Related to Technology: Although the Company’s strategy includes investment in research and development of new and innovative products to meet technology advances, there can be no assurance that the Company will be successful in competing against new technologies developed by competitors.

Risks Related to Foreign Operations: Approximately 50% of the Company’s sales and 40% of net assets relate to foreign operations. Foreign operations are subject to special risks that can materially affect the sales, profits, cash flows, and financial position of the Company, including taxes and other restrictions on distributions and payments, currency exchange rate fluctuations, political and economic instability, inflation, minimum capital requirements, and exchange controls. In particular, the Company’s Brazilian operations, which constitute over half of the Company’s revenues from foreign operations, can be very volatile, changing from year to year due to the political situation and economy. As a result, the future performance of the Brazilian operations may be difficult to forecast.

Risks Related to Industrial Manufacturing Sector: The market for most of the Company’s products is subject to economic conditions affecting the industrial manufacturing sector, including the level of capital spending by industrial companies and the general movement of manufacturing to low cost foreign countries where the Company does not have a substantial market presence. Accordingly, economic weakness in the industrial manufacturing sector as well as the shift of manufacturing to low cost counties where the Company does not have a substantial market presence may, and in some cases has, resulted in decreased demand for certain of the Company’s products, which adversely affects sales and performance. Economic weakness in the consumer market could adversely impact the Company’s performance as well. In the event that demand for any of the Company's products declines significantly, the Company could be required to recognize certain costs as well as asset impairment charges on long-lived assets related to those products.

Risks Related to Competition: The Company’s business is subject to direct and indirect competition from both domestic and foreign firms. In particular, low cost foreign sources have created severe competitive pricing pressures. Under certain circumstances, including significant changes in U.S. and foreign currency relationships, such pricing pressures tend to reduce unit sales and/or adversely affect the Company’s margins.

Risks Related to Customer Concentration: Sears sales and unit volume have decreased significantly during fiscal 2007 and 2008 and the first half of fiscal 2009 has been flat with prior periods. This situation is problematic and if the Sears Craftsman brand we support is no longer viable, this would have a negative effect on the Company’s financial performance. The further loss or reduction in orders by Sears or any of the Company’s remaining large customers, including reductions due to market, economic or competitive conditions could adversely affect business and results of operations. Moreover, the Company’s major customers have placed, and may continue to place pressure on the Company to reduce its prices. This pricing pressure may affect the Company’s margins and revenues and could adversely affect business and results of operations.

Risks Related to Insurance Coverage: The Company carries liability, property damage, workers' compensation, medical, and other insurance coverages that management considers adequate for the protection of its assets and operations. There can be no assurance, however, that the coverage limits of such policies will be adequate to cover all claims and losses. Such uncovered claims and losses could have a material adverse effect on the Company. The Company self-insures for dental benefits and retains risk in the form of deductibles and sublimits for most coverages noted above. Depending on the risk, deductibles can be as high as 5% of the loss or $.5 million.

Risks Related to Raw Material and Energy Costs: Steel is the principal raw material used in the manufacture of the Company’s products. The price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which the Company has no control. During fiscal 2008, the cost of steel rose

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approximately 7%. The cost of producing the Company's products is also sensitive to the price of energy for which the Company has recently experienced increases. The selling prices of the Company’s products have not always increased in response to raw material, energy or other cost increases, and the Company is unable to determine to what extent, if any, it will be able to pass future cost increases through to its customers. Indeed, the Company has recently experienced difficulty in passing along the increases in steel and energy costs to its major customers. The Company's inability to pass increased costs through to its customers could materially and adversely affect its financial condition or results of operations.

Risks Related to Stock Market Performance: Although the Company's domestic defined benefit pension plan is overfunded, another significant drop in the stock market, even if short in duration, could cause the plan to become temporarily underfunded and require the temporary reclassification of prepaid pension cost on the balance sheet from an asset to a contra equity account, thus reducing stockholders' equity and book value per share and additional funding of the plans may also be necessary. There would be a similar risk to the Company’s UK plan, which was underfunded during fiscal 2007 and 2008.

Risks Related to Acquisitions: Acquisitions, such as our acquisition of Tru-Stone in fiscal 2006 and Kinemetric Engineering in fiscal 2008, involve special risks, including, the potential assumption of unanticipated liabilities and contingencies, difficulty in assimilating the operations and personnel of the acquired businesses, disruption of the Company’s existing business, dissipation of the Company’s limited management resources, and impairment of relationships with employees and customers of the acquired business as a result of changes in ownership and management. While the Company believes that strategic acquisitions can improve its competitiveness and profitability, the failure to successfully integrate and realize the expected benefits of such acquisitions could have an adverse effect on the Company’s business, financial condition and operating results.

Risks Related to Investor Expectations. The Company's operating results have fluctuated from quarter to quarter in the past, and the Company expects that they will continue to do so in the future. The Company's earnings may not continue to grow at rates similar to the growth rates achieved in recent years and may fall short of either a prior quarter or investors’ expectations. If the Company fails to meet the expectations of securities analysts or investors, the Company's share price may decline.

Risks Related to Information Systems. The efficient operation of the Company's business is dependent on its information systems, including its ability to operate them effectively and to successfully implement new technologies, systems, controls and adequate disaster recovery systems. In addition, the Company must protect the confidentiality of data relating to its business, employees, customers and other third parties. The failure of the Company's information systems to perform as designed or the Company’s failure to implement and operate such systems effectively could disrupt the Company's business or subject it to liability and thereby harm its profitability.

Risks Related to Litigation and Changes in Laws, Regulations and Accounting Rules. Various aspects of the Company's operations are subject to federal, state, local or foreign laws, rules and regulations, any of which may change from time to time. Generally accepted accounting principles may change from time to time, as well. In addition, the Company is regularly involved in various litigation matters that arise in the ordinary course of business. Litigation, regulatory developments and changes in accounting rules and principles could adversely affect the Company's business operations and financial performance.

Item 2.                      Unregistered Sales of Equity Securities and Use of Proceeds

A summary of the Company's repurchases of shares of its common stock for the three months ended December 27, 2008 is as follows:

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Shares Purchased	Average Price	Shares Purchased Under Announced Programs	Shares yet to be Purchased Under Announced Programs
9/27/08-11/1/08	15,000	$12.55	15,000	none
11/2/08-11/29/08	none			none
11/30/08-12/27/08	none			none

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

(a)   The annual meeting of shareholders was held on October 8, 2008.

(c)        The following directors were elected at the annual meeting:

	Votes For	Votes Withheld	Abstentions and Broker Non-votes
Class A shares voting as separate class:
Ralph G. Lawrence	4,912,558	297,084	N/A
Class A and B shares voting together:
Stephen F. Walsh	12,043,428	272,364	N/A
Salvador de Camargo, Jr.	12,123,545	352,484	N/A

Item 6.                      Exhibits

See the exhibit index following the signature page to this quarterly report.

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.

		THE L. S. STARRETT COMPANY (Registrant)
Date	February 5, 2009	S/R. J. Hylek
		R. J. Hylek (Treasurer and Chief Financial Officer)
Date	February 5, 2009	S/R. J. Simkevich
		R.J. Simkevich (Corporate Controller)

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EXHIBIT INDEX

Exhibit Number                                Description

10.1 Change in Control Agreement, dated as of January 16, 2009, between the Company and Douglas A. Starrett.

10.2 Form of Change in Control Agreements, dated as of January 16, 2009, executed separately by the Company and each of Randall J. Hylek and Stephen F. Walsh.

10.3 Form of Non-Compete Agreements, dated as of January 16, 2009, executed separately by the Company and each of Douglas A Starrett, Randall J. Hylek and Stephen F. Walsh.

31.a Certification of Chief Executive Officer pursuant to Rules 13a-15(e)/15(d)-15(e) and 13a-15(f)/15(d)-15(f).

31.b Certification of Chief Financial Officer pursuant to Rules 13a-15(e)/15(d)-15(e) and 13a-15(f)/15(d)-15(f).

32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

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EX-10.1

EXHIBIT 10.1

Change in Control Agreement

January 16, 2009

Douglas A. Starrett

690 Spring Street

Athol, MA 01331

Dear Doug:

The L.S. Starrett Company (the “Company”) considers it important and in the best interests of its stockholders to foster the continuous employment of key management personnel.  In this connection, the Board of Directors of the Company (the “Board”) recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company and its stockholders.

The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of certain members of the Company's management, including you, to their assigned duties in the face of potentially distracting circumstances arising from the possibility of a change in control of the Company.

In order to motivate you to remain in the employ of the Company in your current management position, the Company agrees that you shall receive certain benefits set forth in this letter agreement (the “Agreement”) in the event of a Change in Control of the Company.

1.   Term of this Agreement.  The term of this Agreement (the “Term”) shall commence on the date hereof and shall continue in effect through June 30, 2010; provided, however, that on July 1, 2010 and each July 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than June 15 of such year, the Company shall have given written notice that it does not wish to extend this Agreement (provided that no such notice may be given during the pendency of a potential Change in Control of the Company); and, provided further, that if a Change in Control of the Company shall have occurred during the original or extended Term of this Agreement, this Agreement shall continue in effect for a period of not less than thirty-six (36) months beyond the month in which such Change in Control occurred. Notwithstanding the termination of your employment, any obligations hereunder which by their terms continue shall survive such termination. This Agreement does not constitute a contract of employment. Any termination of your employment by the Company or by you during the Term shall be communicated by a written notice of termination (“Notice of Termination”) to the other party hereto in accordance with Section 7. The “Date of Termination” shall mean the effective date of such termination as specified in the Notice of Termination; provided, however, that no such Notice of Termination shall specify an effective date more than one hundred eighty (180) days after the date of such Notice of Termination nor less than thirty (30) days.

2.   Change in Control. For purposes of this Agreement, a “Change in Control” shall occur or be deemed to have occurred only if any of the following events occur:

(a)   any “person”, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (other than the Company, any group of persons which includes you, any employee benefit plan of the Company, any entity owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company, or any other person owning thirty (30) percent or more of the combined voting power of the company as of the date hereof) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing in the aggregate thirty percent (30%) or more of the combined voting power of the Company's then outstanding voting securities or more than fifty percent (50%) of the total fair market value of the Company; or

(b)   a majority of the members of the Board (as of the date hereof, the “Incumbent Board”) is replaced during any 12 month period (except as a result of a transaction with any group of persons which includes you), provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or

(c)   the stockholders of the Company approve a merger or consolidation of the Company with any other entity, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than thirty percent (30%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected solely to implement a recapitalization of the Company (or similar transaction) in which no “person” (as hereinabove defined) increases the percentage held of the combined voting power of the Company's then outstanding securities, or (iii) a merger or consolidation with any affiliate of yours; or

(d)   the consummation of transactions contemplated by a resolution of the Board whereby any person or persons (except a related person as provided in Section 1.409A-3(i)(5)(vii)(B) of the Treasury Regulations issued under Section 409A) acquire all or substantially all of the assets of the Company, whether in a single transaction or series of transactions during the 12 month period ending on the date of the most recent acquisition by such person or persons; or

(e)   the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale, lease, exchange or disposition by the Company of all or substantially all of the Company's assets.

3.   Compensation and Benefits Upon a Change in Control.

(a)   Upon a Change in Control (a “Trigger Event”) and notwithstanding any change in your employment with the Company, but subject to the provisions of Section 5, the Company will pay to you within thirty (30) days of the Trigger Event a lump sum amount equal to the aggregate of:

(i)   three times your annual base salary at the rate in effect immediately prior to the Trigger Event (or such higher rate as may have been in effect within the ninety (90) days prior to any Notice of Termination); and

(ii)   three times the annualized amount equal to the average annual cash bonus paid to (or accrued for) you by the Company during the three (3) full years preceding such Trigger Event.

(b)   Immediately prior to a Change of Control, all of your then outstanding options to purchase common stock of the Company shall be accelerated so that they shall become immediately exercisable in full; provided, in the event of a Change of Control as a result of a tender offer, such options shall become fully exercisable in a timely manner such that you may participate in such tender offer at any stage.

(c)   (i) For the period terminating thirty-six (36) months after the Trigger Event (the “Benefit Termination Date”), the Company shall maintain in full force and effect, for the continued benefit of you, your spouse and your dependents, all insured and self-insured employee medical, dental, and prescription drug plans in which you were eligible to participate immediately before the Trigger Event, provided that your continued participation is possible under such plans and you continue to pay the contribution amounts that the Company customarily charges employee participants in such plans for such coverage.  If and to the extent that your continued participation is NOT possible under one or more of such plans, you, your spouse and/or dependents may elect COBRA health care continuation coverage under that plan or those plans, provided that the Company shall pay the COBRA premium costs for such coverage, and if such COBRA coverage is not available or can only be provided for a period that terminates before the Benefit Termination Date, in each case for reasons other than discretionary acts by you, your spouse and/or dependents, then the Company shall pay you in a lump sum cash payment on the first day of each month during the period that begins on the date that such coverage is not available or cannot be provided and ends on the Benefit Termination Date, equal to the COBRA premium (or the full monthly premium cost, if no COBRA premium is prescribed) for coverage.

(ii) If your employment with the Company is terminated before the Benefit Termination Date for any reason, the Company will pay to you within thirty (30) days of your termination of employment a lump sum cash payment equal to the dollar amount defined in paragraph (A) reduced by the dollar amount defined in paragraph (B) below.

(A)   The lump sum cash present value, determined as of the Benefit Termination Date using reasonable actuarial assumptions, of the accrued benefit payable to you at your normal retirement date in the form of a single life annuity under the Company’s pension plan as in effect on the Trigger Date, assuming that you are continuously employed by the Company through the Benefit Termination Date and receive compensation through that date at your rate of earnings in effect on the date of the Trigger Event.

(B)   The lump sum cash present value, determined as of the date that your employment with the Company terminated using reasonable actuarial assumptions, of the accrued benefit payable to you at your normal retirement date in the form of a single life annuity under the Company’s pension plan.

(d)   The Company shall maintain with a reputable carrier directors and officers liability coverage for your benefit with coverage amounts at least equal to those in place prior to the Trigger Event and on terms at least as favorable as the terms of such coverage prior to the Trigger Event.

(e)   The Company hereby covenants and agrees that in the event of a Change of Control the Company and its successors and assigns will continue in effect any Plan (as hereinafter defined, excluding any equity compensation plan) in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits in the aggregate), and that it will not take any action, or fail to take any action, which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit of such Plans enjoyed by you at the time of the Change in Control.

4.   Taxes.

(a)   All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes.

(i)   Subject to the other provisions of this Section 4, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable, distributed or distributable, including, without limitation, the acceleration of vesting of any equity compensation or other benefit or award, but determined without regard to any additional payments required under this subparagraph (i)) (each, a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then you shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount sufficient to pay the Excise Tax on the Payments plus any federal, state, or local income taxes, employment taxes, and any Excise Tax imposed upon the Gross-Up Payment.

(ii)   Subject to the other provisions of this Section 4, all determinations required to be made under this Section 4, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be used in arriving at such determination, shall be made by a certified public accounting firm selected by the Company and reasonably acceptable to you (the “Accounting Firm”), which shall be retained to provide detailed supporting calculations both to the Company and you within 15 business days of the receipt of notice from you that there has been a Payment, or such earlier time as the Company requests.  If the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall have the right to appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder).  All fees and expenses of the Accounting Firm shall be paid solely by the Company.  Any Gross-Up Payment, as determined pursuant to this Section 4, shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm’s determination, but in no event later than December 31st of the year following the year in which the Excise Tax is remitted to the taxing authority.  Any determination by the Accounting Firm shall be binding upon the Company and you.  As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which should have been made will not have been made by the Company (“Underpayment”), consistent with the calculations required to be made hereunder.  If the Company exhausts its remedies pursuant to subparagraph (i) of this Section 4 and you thereafter are required to pay an Excise Tax in an amount that exceeds the Gross-Up Payment received by you, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for your benefit.

(iii)   You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would result in an Underpayment.  Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid or appealed.  You shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due).  If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall:

(A)   give the Company any information reasonably requested by the Company relating to such claim;

(B)   take such action in connection with contesting such claims as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company;

(C)   cooperate with the Company in good faith in order to effectively contest such claim; and

(D)   permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses.  Without limitation on the foregoing provisions of this subparagraph (iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount.  Furthermore, the Company’s control of the contest shall be limited to issues with respect to the amount of the Gross-Up Payment, and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(iv)   If, after the receipt by you of an amount advanced by the Company pursuant to this Section 4, you become entitled to receive any refund with respect to such claim, you shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto).

(v)   Notwithstanding any other provision of this Section 4, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for your benefit, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding.

5.   Code Section 409A Legal Requirements.  This Agreement and the benefits provided hereunder are intended to be exempt from or to comply with the requirements of Section 409A of the Code and the Treasury Regulations and other applicable guidance issued by the Treasury Department or Internal Revenue Service thereunder (collectively, “Section 409A”), and shall be interpreted and administered consistent with such intent.  To the extent required for compliance with the requirements of Section 409A, references in this Agreement to a termination of employment and similar or correlative terms shall mean a “separation of service” within the meaning of Section 409A. from the Company and all other corporations and trades or businesses, if any, that would be treated as a single "service recipient" with the Company under Section 409A.

Notwithstanding anything to the contrary in this Agreement, if you are a “specified employee” as defined and applied in Section 409A of the Code as of the Date of Termination, to the extent any payment under this Agreement constitutes deferred compensation (after taking into account any applicable exemptions from Section 409A of the Code) which is payable on account of your separation from service, and to the extent required by Section 409A of the Code, no payments due under this Agreement may be made until the earlier of: (i) the first day following the sixth-month anniversary of your Date of Termination, or (ii) your date of death; provided, however, that any payments delayed during this six-month period shall be paid in the aggregate in a lump sum as soon as administratively practicable following the sixth month anniversary of your Date of Termination.  If you die on or after the Date of Termination and prior to the sixth month anniversary of your Date of Termination, any amount delayed pursuant to this Section 5 shall be paid to your estate or beneficiary, as applicable, within 30 days following the date of your death.   For purposes of Section 409A of the Code, each “payment” (as defined by Section 409A of the Code) made under this Agreement shall be considered a “separate payment.”

If either party to this Agreement determines that this Agreement violates Section 409A of the Code and that an amendment of this Agreement would avoid the imposition on any person of additional taxes, penalties or interest under Section 409A of the Code (a “Compliance Amendment”), then that party shall propose the terms of the Compliance Amendment to the other party.  The parties shall then in good faith negotiate the terms of any such proposed Compliance Amendment.  If an agreement concerning the proposed Compliance Amendment cannot be reached by the parties after the Company determines that a reasonable period of time to consider the terms of the proposal has passed, then the Company shall have the unilateral right to amend this Agreement to the extent the Company deems such action necessary or advisable to avoid the imposition on any person of additional taxes, penalties or interest under Section 409A of the Code.  Any such Compliance Amendment shall be made in a manner which, to the maximum extent the Company agrees or reasonably and in good faith determines to be possible, retains the economic and tax benefits to you hereunder while not increasing the cost to the Company of providing such benefits to you.

6.   Successors and Assigns; Binding Agreement.

(a)   The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you had been terminated without Cause. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(b)   This Agreement, and the your rights and obligations hereunder, may not be assigned by you, nor may you pledge, encumber or anticipate any payments or benefits due hereunder, by operation of law or otherwise.

The Company may assign its rights, together with its obligations, hereunder: (i) to any affiliate; or (ii) to a third party in connection with any sale, transfer or other disposition of all or substantially all of any business to which your services are then principally devoted; provided, however, that no assignment pursuant to this paragraph shall relieve the Company from its obligations hereunder to the extent the same are not timely discharged by such assignee.

(c)   This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate.

7.   Notice. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be duly given when delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the President of the Company, at the Company's main office, and to you at the address shown above or to such other address as either the Company or you may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

8.   Miscellaneous.

(a)   The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

(b)   The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts.

(c)   This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement.

(d)   This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

(e)   Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law.

(f)   This Agreement replaces and terminates any prior agreement or understanding between you and the Company with respect to the subject matter hereof.

If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject.

Sincerely,

THE L.S. STARRETT COMPANY

By: /s/ Randall J. Hylek

Randall J. Hylek

Treasurer and Chief Financial Officer

Agreed to this 16th day of January, 2009

/s/ Douglas A. Starrett

Douglas A. Starrett

Address:

680 Spring Street

Athol, MA 01331

EX-10.2

EXHIBIT 10.2

Form of

Change in Control Agreement

January 16, 2009

[Name]

[Address]

Dear _____________:

The L.S. Starrett Company (the “Company”) considers it important and in the best interests of its stockholders to foster the continuous employment of key management personnel.  In this connection, the Board of Directors of the Company (the “Board”) recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company and its stockholders.

The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of certain members of the Company's management, including you, to their assigned duties in the face of potentially distracting circumstances arising from the possibility of a change in control of the Company.

In order to motivate you to remain in the employ of the Company in your current management position, the Company agrees that you shall receive the benefits set forth in this letter agreement (the “Agreement”) in the event your employment in your current management position with the Company is terminated under the circumstances described below subsequent to a Change in Control of the Company.

1.   Term of this Agreement.  The term of this Agreement (the “Term”) shall commence on the date hereof and shall continue in effect through June 30, 2010; provided, however, that on July 1, 2010 and each July 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than June 15 of such year, the Company shall have given written notice that it does not wish to extend this Agreement (provided that no such notice may be given during the pendency of a potential Change in Control of the Company); and, provided further, that if a Change in Control of the Company shall have occurred during the original or extended Term of this Agreement, this Agreement shall continue in effect for a period of not less than twenty-four (24) months beyond the month in which such Change in Control occurred. Notwithstanding the termination of your employment, any obligations hereunder which by their terms continue shall survive such termination. This Agreement does not constitute a contract of employment. Any termination of your employment by the Company or by you during the Term shall be communicated by a written notice of termination (“Notice of Termination”) to the other party hereto in accordance with Section 8. The “Date of Termination” shall mean the effective date of such termination as specified in the Notice of Termination; provided, however, that no such Notice of Termination shall specify an effective date more than one hundred eighty (180) days after the date of such Notice of Termination nor, except in the event of a termination for Cause or Good Reason, less than thirty (30) days.

2.   Certain Definitions. As used herein, the following terms shall have the following respective meanings:

(a)   Change in Control. For purposes of this Agreement, a “Change in Control” shall occur or be deemed to have occurred only if any of the following events occur:

(i)   any “person”, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (other than the Company, any group of persons which includes you, any employee benefit plan of the Company, any entity owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company, or any other person owning thirty (30) percent or more of the combined voting power of the company as of the date hereof) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing in the aggregate thirty percent (30%) or more of the combined voting power of the Company's then outstanding voting securities or more than fifty percent (50%) of the total fair market value of the Company; or

(ii)   a majority of the members of the Board (as of the date hereof, the “Incumbent Board”) is replaced during any 12 month period (except as a result of a transaction with any group of persons which includes you), provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or

(iii)   the stockholders of the Company approve a merger or consolidation of the Company with any other entity, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than thirty percent (30%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected solely to implement a recapitalization of the Company (or similar transaction) in which no “person” (as hereinabove defined) increases the percentage held of the combined voting power of the Company's then outstanding securities, or (C) a merger or consolidation with any affiliate of yours; or

(iv)   the consummation of transactions contemplated by a resolution of the Board whereby any person or persons (except a related person as provided in Section 1.409A-3(i)(5)(vii)(B) of the Treasury Regulations issued under Section 409A) acquire all or substantially all of the assets of the Company, whether in a single transaction or series of transactions during the 12 month period ending on the date of the most recent acquisition by such person or persons; or

(v)   the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale, lease, exchange or disposition by the Company of all or substantially all of the Company's assets.

(b)   Cause. The following shall constitute cause for termination of your employment:

(i)   the material failure by you to perform your duties (other than any such failure resulting from your incapacity due to physical or mental illness) that, if capable of being cured, has not been cured within ten (10) days after notice to you setting forth in reasonable detail the manner in which you have not performed your duties; or

(ii)   conviction of or plea of guilty or nolo contendere to a felony or any other crime involving dishonesty, fraud or moral turpitude; or

(iii)   deliberate dishonesty with respect to the Company or any of its affiliates; or

(iv)   being found liable in any SEC or other civil or criminal securities law action, or the entry of any cease and desist order with respect to such action (regardless of whether or not you admit or deny liability); or

(v)   breach of your fiduciary duties to the Company which may reasonably be expected to have a material adverse effect on the Company; or

(vi)   obstructing or impeding, or failing to materially cooperate with, any investigation authorized by the Board or any governmental or self-regulatory entity; or

(vii)   violation of any nondisclosure, nonsolicitation, non-hire, or noncompete agreement or policy that is applicable to you which violation may reasonably be expected to have a material adverse effect on the Company or its reputation; or

(viii)   violation of any policy of the Company that is generally applicable to all employees or officers of the Company including, but not limited to, policies concerning insider trading, workplace violence, discrimination, or sexual harassment, or the Company’s code of conduct, that you know or reasonably should know could reasonably be expected to result in a material adverse effect on the Company or its reputation; or

(ix)   willful action or gross negligence that results in any restatement of earnings of the Company; or

(x)   unlawful conduct pertaining to the Company or any of its affiliates involving a criminal act; material or conscious falsification or unauthorized disclosure of important records or reports; embezzlement or unauthorized conversion of property; violation of conflict of interest or vendor relations policies, willful disclosure of significant trade secrets or other information likely to be used to the detriment of the Company.

(c)   Good Reason.  For purposes of this Agreement, “Good Reason” shall mean, without your written consent, the occurrence within ninety (90) days immediately prior to your giving the Company notice of the following circumstances, except that no such circumstance shall constitute "Good Reason" in the event that the Company remedies the condition within 30 days of its receipt of such notice, and provided that your separation of service occurs within two years after the occurrence of such circumstance;

(i)   a material decrease in the nature and scope of authority, powers, functions, and duties exercised by you immediately prior to a Change in Control, including, without limitation, any adverse change in your status or position as an employee of the Company as a result of a material diminution in your duties or responsibilities or the assignment to you of any duties or responsibilities which are materially inconsistent with such status or position(s) (other than any isolated and inadvertent failure by the Company that is cured promptly upon your giving notice), or any removal of you from or any failure to reappoint or reelect you to such position(s) (except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason); or

(ii)   any reduction in your annual base salary from that in effect immediately prior to the Change in Control (other than a fifteen percent (15%) or less reduction in base salary imposed on all key management personnel who have an agreement with the Company similar to this Agreement); or

(iii)   the Company requiring you to be based at an office that is both more than fifty (50) miles from where your office is located immediately prior to the Change in Control and further from your then current residence except for required travel on the Company’s business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control; or

(iv)   any other breach or inaction that constitutes a material breach by the Company of this Agreement, including breach of the covenant in Section 4(e) below.

(d)   Disability. If, as a result of incapacity due to physical or mental illness, you shall have been absent from the full-time performance of the essential functions of your position with the Company for three (3) consecutive months or for six (6) months in any twelve (12) consecutive month period and, within thirty (30) days after written Notice of Termination is given to you, you shall not have returned to the full-time performance of your duties, your employment may be terminated for “Disability.”

(e)   Plan.  For purposes of this Section 2, “Plan” shall mean any compensation plan, program or policy of the Company intended to benefit employees.

3.   Change in Employment Status.

(a)   Any termination of your employment by the Company or by you following a Change in Control during the Term shall be communicated by a Notice of Termination to the other party hereto in accordance with Section 8, which Notice of Termination shall specify the provisions of this Agreement, if any, upon which such termination is based.

(b)   You shall be entitled to the benefits provided in Section 4 if, and only if, the following event (a “Trigger Event”) occurs: a Change in Control shall have occurred during the Term and your employment with the Company is subsequently terminated or terminates for any reason within twenty-four (24) months after such Change in Control, unless such termination is:

(i)   because of your death or Disability, or

(ii)   by the Company for Cause, or

(iii)   by you other than for Good Reason.

4.   Compensation and Benefits Upon Termination.

(a)   Subject to the provisions of Section 6, in the event of the occurrence of a Trigger Event, the Company will pay to you within thirty (30) days of the Date of Termination a lump sum amount equal to the aggregate of:

(i)   one and one-half times your annual base salary at the rate in effect immediately prior to the Trigger Event (or such higher rate as may have been in effect within the ninety (90) days prior to the Notice of Termination); and

(ii)   one and one-half times the annualized amount equal to the average annual cash bonus paid to (or accrued for) you by the Company during the three (3) full years preceding such Trigger Event or such shorter period of your employment divided by the lesser of three (3) or the period of your employment (expressed in years and any fraction thereof).

(b)   (i) For the period terminating eighteen (18) months after the Trigger Event, (the “Benefit Termination Date”), the Company shall maintain in full force and effect, for the continued benefit of you, your spouse and your dependents, all insured and self-insured employee medical, dental, and prescription drug plans in which you were eligible to participate immediately before the Trigger Event, provided that your continued participation is possible under such plans and you continue to pay the contribution amounts that the Company customarily charges employee participants in such plans for such coverage.  If and to the extent that your continued participation is NOT possible under one or more of such plans, you, your spouse and/or dependents may elect COBRA health care continuation coverage under that plan or those plans, provided that the Company shall pay the COBRA premium costs for such coverage, and if such COBRA coverage is not available or can only be provided for a period that terminates before the Benefit Termination Date, in each case for reasons other than discretionary acts by you, your spouse and/or dependents, then the Company shall pay you in a lump sum cash payment on the first day of each month during the period that begins on the date that such coverage is not available or cannot be provided and ends on the Benefit Termination Date, equal to the COBRA premium (or the full monthly premium cost, if no COBRA premium is prescribed) for coverage.

(ii) Additionally, in the event of a Trigger Event, the Company will pay to you within thirty (30) days of your Date of Termination a lump sum cash payment equal to the dollar amount defined in paragraph (A) reduced by the dollar amount defined in paragraph (B) below.

(A)   The lump sum cash present value, determined as of the Benefit Termination Date using reasonable actuarial assumptions, of the accrued benefit payable to you at your normal retirement date in the form of a single life annuity under the Company’s pension plan as in effect on the Trigger Event, assuming that you are continuously employed by the Company through the Benefit Termination Date and receive compensation through that date at your rate of earnings in effect on the date of the Trigger Event.

(B)   The lump sum cash present value, determined as of the date that your employment with the Company terminated using reasonable actuarial assumptions, of the accrued benefit payable to you at your normal retirement date in the form of a single life annuity under the Company’s pension plan.

(c)   The Company shall maintain with a reputable carrier directors and officers liability coverage for your benefit with coverage amounts at least equal to those in place prior to the Trigger Event and on terms at least as favorable as the terms of such coverage prior to the Trigger Event.

(d)   Immediately prior to a Change of Control, all of your then outstanding options to purchase common stock of the Company shall be accelerated so that they shall become immediately exercisable in full; provided, in the event of a Change of Control as a result of a tender offer, such options shall become fully exercisable in a timely manner such that you may participate in such tender offer at any stage.

(e)   The Company hereby covenants and agrees that in the event of a Change of Control the Company and its successors and assigns will continue in effect any Plan (as hereinafter defined, excluding any equity compensation plan) in which you are participating at the time of the Change in Control of the Company (or Plans providing you with at least substantially similar benefits in the aggregate), and that it will not take any action, or fail to take any action, which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit of such Plans enjoyed by you at the time of the Change in Control.

5.   Taxes.

(a)   All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes.

(i)   Subject to the other provisions of this Section 5, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable, distributed or distributable, including, without limitation, the acceleration of vesting of any equity compensation or other benefit or award, but determined without regard to any additional payments required under this subparagraph (i)) (each, a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then you shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount sufficient to pay the Excise Tax on the Payments plus any federal, state, or local income taxes, employment taxes, and any Excise Tax imposed upon the Gross-Up Payment.

(ii)   Subject to the other provisions of this Section 5, all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be used in arriving at such determination, shall be made by a certified public accounting firm selected by the Company and reasonably acceptable to you (the “Accounting Firm”), which shall be retained to provide detailed supporting calculations both to the Company and you within 15 business days of the receipt of notice from you that there has been a Payment, or such earlier time as the Company requests.  If the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall have the right to appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder).  All fees and expenses of the Accounting Firm shall be paid solely by the Company.  Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm’s determination, but in no event later than December 31st of the year following the year in which the Excise Tax is remitted to the taxing authority.  Any determination by the Accounting Firm shall be binding upon the Company and you.  As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which should have been made will not have been made by the Company (“Underpayment”), consistent with the calculations required to be made hereunder.  If the Company exhausts its remedies pursuant to subparagraph (i) of this Section 5 and you thereafter are required to pay an Excise Tax in an amount that exceeds the Gross-Up Payment received by you, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for your benefit.

(iii)   You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would result in an Underpayment.  Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid or appealed.  You shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due).  If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall:

(A)   give the Company any information reasonably requested by the Company relating to such claim;

(B)   take such action in connection with contesting such claims as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company;

(C)   cooperate with the Company in good faith in order to effectively contest such claim; and

(D)   permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses.  Without limitation on the foregoing provisions of this subparagraph (iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount.  Furthermore, the Company’s control of the contest shall be limited to issues with respect to the amount of the Gross-Up Payment, and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(iv)   If, after the receipt by you of an amount advanced by the Company pursuant to this Section 5, you become entitled to receive any refund with respect to such claim, you shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto).

(v)   Notwithstanding any other provision of this Section 5, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for your benefit, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding.

6.   Code Section 409A Legal Requirements.  This Agreement and the benefits provided hereunder are intended to be exempt from or to comply with the requirements of Section 409A of the Code and the Treasury Regulations and other applicable guidance issued by the Treasury Department or Internal Revenue Service thereunder (collectively, “Section 409A”), and shall be interpreted and administered consistent with such intent.  To the extent required for compliance with the requirements of Section 409A, references in this Agreement to a termination of employment and similar or correlative terms shall mean a “separation of service” within the meaning of Section 409A from the Company and all other corporations and trades or businesses, if any, that would be treated as a single "service recipient" with the Company under Section 409A.

Notwithstanding anything to the contrary in this Agreement, if you are a “specified employee” as defined and applied in Section 409A of the Code as of the Date of Termination, to the extent any payment under this Agreement constitutes deferred compensation (after taking into account any applicable exemptions from Section 409A of the Code) which is payable on account of your separation from service, and to the extent required by Section 409A of the Code, no payments due under this Agreement may be made until the earlier of: (i) the first day following the sixth-month anniversary of your Date of Termination, or (ii) your date of death; provided, however, that any payments delayed during this six-month period shall be paid in the aggregate in a lump sum as soon as administratively practicable following the sixth month anniversary of your Date of Termination.  If you die on or after the Date of Termination and prior to the sixth month anniversary of your Date of Termination, any amount delayed pursuant to this Section 6 shall be paid to your estate or beneficiary, as applicable, within 30 days following the date of your death.   For purposes of Section 409A of the Code, each “payment” (as defined by Section 409A of the Code) made under this Agreement shall be considered a “separate payment.”  For the avoidance of doubt, all payments under this Agreement are to be paid no later than the last day of the second taxable year following the taxable year of your Date of Termination, in accordance with the separation pay exclusion described in Section 1.409A-1(b)(9)(iii)(B) of the Treasury Regulations issued under Section 409A.  In the event that the amount payable under this Agreement exceeds the amount specified in Section 1.409A-1(b)(9)(iii)(A) of such Regulations, the portion of such payment which does not constitute deferred compensation will be paid to you in accordance with the timing rules of Section 4 of this Agreement, and only the portion of such payment which constitutes deferred compensation (if any) will be subject to the 6-month delay described above.

If either party to this Agreement determines that this Agreement violates Section 409A of the Code and that an amendment of this Agreement would avoid the imposition on any person of additional taxes, penalties or interest under Section 409A of the Code (a “Compliance Amendment”), then that party shall propose the terms of the Compliance Amendment to the other party.  The parties shall then in good faith negotiate the terms of any such proposed Compliance Amendment.  If an agreement concerning the proposed Compliance Amendment cannot be reached by the parties after the Company determines that a reasonable period of time to consider the terms of the proposal has passed, then the Company shall have the unilateral right to amend this Agreement to the extent the Company deems such action necessary or advisable to avoid the imposition on any person of additional taxes, penalties or interest under Section 409A of the Code.  Any such Compliance Amendment shall be made in a manner which, to the maximum extent the Company agrees or reasonably and in good faith determines to be possible, retains the economic and tax benefits to you hereunder while not increasing the cost to the Company of providing such benefits to you and shall not be a basis for a resignation by you for Good Reason under this Agreement.

7.   Successors and Assigns; Binding Agreement.

(a)   The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement prior to the effectiveness of any succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you had been terminated without Cause. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(b)   This Agreement, and the your rights and obligations hereunder, may not be assigned by you, nor may you pledge, encumber or anticipate any payments or benefits due hereunder, by operation of law or otherwise.

The Company may assign its rights, together with its obligations, hereunder: (i) to any affiliate; or (ii) to a third party in connection with any sale, transfer or other disposition of all or substantially all of any business to which your services are then principally devoted; provided, however, that no assignment pursuant to this paragraph shall relieve the Company from its obligations hereunder to the extent the same are not timely discharged by such assignee.

(c)   This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate.

8.   Notice. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be duly given when delivered or when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the President of the Company, at the Company's main office, and to you at the address shown above or to such other address as either the Company or you may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

9.   Miscellaneous.

(a)   The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

(b)   The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts.

(c)   This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement.

(d)   This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

(e)   Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law.

(f)   This Agreement replaces and terminates any prior agreement or understanding between you and the Company with respect to the subject matter hereof.

If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject.

Sincerely,

THE L.S. STARRETT COMPANY

By:_________________________

Agreed to this 16th day of January, 2009

______________________________

(Signature)

______________________________

(Print Name)

Address

_____________________________

_____________________________

EX-10.3

EXHIBIT 10.3

FORM OF

AGREEMENT NOT TO COMPETE

I recognize that The L.S. Starrett Company, a Massachusetts corporation (the “Company”, which term includes its subsidiaries and affiliated entities) desires to retain me in its employ, to safeguard its trade secrets, confidential business information and customer good will, and to ensure that I do not compete with the Company, as specified below, in the event my employment with the Company is terminated.

In consideration of the terms of that certain Change in Control Letter Agreement from the Company to me dated the same date as this Agreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged, I agree as follows:

1.I will not, for a period of 18 months commencing with the termination of my employment with the Company for any reason, engage (directly or indirectly) in any activities or render any services similar or reasonably related to those in which I was engaged or those that I rendered as an employee of the Company during any part of the two-year period preceding my termination, for any trade or business which competes with the Company in any place where the Company does or may do business or in any line of business engaged in (or planned to be engaged in) by the Company, whether now existing or hereafter established.  I will not engage in such activities or render such services for myself or on behalf of any other person or entity engaged or about to become engaged in such competitive activities.

2.I agree that for a period of one (1) year following the termination of my employment with the Company for any reason, I will not solicit or in any manner encourage or induce employees of the Company to leave their employ; nor will I attempt to induce any customers, suppliers, distributors, licensors, or licensees to terminate or diminish their relationships with the Company; nor will I in any manner assist or attempt to assist any third party to do any of the foregoing.  I further agree that, during such period, I will not offer or cause to be offered employment to any person who was employed by the Company at any time during the six (6) months prior to the termination of my employment with the Company.

3.During the course of my employment by the Company, I will learn of the Company’s trade secrets and confidential information or confidential information entrusted to the Company by other persons, corporations, or firms.  The Company’s confidential information includes matters not generally known outside the Company, such as developments relating to existing and future products and services marketed or used by the Company, as well as data relating to the general business operations of the Company (e.g., concerning sales, costs, profits, organizations, customer lists, pricing methods, etc.).  I agree not to disclose to others any trade secrets or confidential information of the Company or of such other persons, corporations, or firms, or otherwise make use of such trade secrets or confidential information, except on the Company’s behalf, whether or not such information is produced by my own efforts, with others, and whether on or off the Company's premises.  I further agree that I am bound by the terms of any agreement between the Company and any third party with respect to the treatment of confidential information of any such third party, including but not limited to the customers and vendors of the Company.  Also, I may learn of developments, ways of business, etc., which in themselves are generally known but whose use by the Company is not generally known, and I agree not to disclose to others such use, whether or not such use is due to my own efforts.

4.Upon termination of my employment for any reason, I agree to leave with the Company all records, drawings, notebooks, documents and other materials pertaining to the Company’s confidential information, whether prepared by me or others, and further agree to make no copies, reproductions or derivations of same.  I further agree to return to the Company any and all equipment, tools or other devices owned by the Company that may then be in my possession or control.

5.My obligations under this Agreement are in addition to any and all obligations I may now or hereafter have under any policy or procedure implemented by the Company with respect to any of the matters covered by this Agreement.

6.My obligations under this Agreement will survive the termination of my employment, regardless of the manner of such termination, and will be binding upon my heirs, executors, administrators and assigns.

7.I agree that, in addition to any other rights and remedies available to the Company for any breach by me of my obligations hereunder, the Company will be entitled to enforcement of my obligations hereunder by court injunction (without the necessity of posting a bond).  The Company shall additionally be entitled to an award of its attorney's fees incurred in enforcing its rights hereunder.

8.If any provision of this Agreement is declared invalid, illegal or unenforceable, then such provision will be enforced to the maximum extent allowed by law.  If such provision is unreasonable to enforce to any extent, such provision will be severed from this Agreement and all remaining provisions will continue in full force and effect.

9.I agree that the periods of restriction set forth in paragraphs 1 and 2 of this Agreement shall be tolled, and shall not run, during any period of time in which I am in violation of the terms hereof, in order that the Company shall have all of the agreed-upon temporal protection recited herein.

10.I understand that the Company may assign this Agreement to any successor of the Company, including any entity that purchases the business and assets of the Company, and that if the Company assigns this Agreement to such purchaser I will remain bound by my obligations hereunder.

11.The provisions of this Agreement are severable, and no breach of any provision of this Agreement by the Company, or any other claimed breach of contract or violation of law, shall operate to excuse my obligation to fulfill the requirements of paragraphs 1 through 4 above.

12.It is agreed and understood that no changes in the nature or scope of my employment relationship with the Company shall operate to extinguish any obligations hereunder or require that this Agreement be re-executed.

13.I acknowledge and agree that this Agreement does not in any way obligate the Company to retain my services for a fixed period or at a fixed level of Compensation;  nor does it in any way restrict my right or that of the Company to terminate my employment at any time, at will, with or without notice or cause.

14.This Agreement will be governed in all respects by the laws of the Commonwealth of Massachusetts.  Each party hereto irrevocably agrees that any suit, action or proceeding arising out of or relating to this Agreement may be instituted only in the federal or state courts located in Worcester County, Massachusetts, and unconditionally accepts and irrevocably submits to the exclusive jurisdiction of the aforesaid courts.

IN WITNESS WHEREOF I have executed this Agreement under seal as of January 16, 2009.

	ACCEPTED AND AGREED TO:
Employee	The L.S. Starrett Company
	By:
	Name:                      Douglas A. Starrett
	Title:           President

EX-31.A

EXHIBIT 31.a

CERTIFICATIONS

I, Douglas A. Starrett, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The L.S. Starrett Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 5, 2009	/S/	Douglas A. Starrett
		Douglas A. Starrett Chief Executive Officer

EX-31.B

EXHIBIT 31.b

CERTIFICATIONS

I, Randall J. Hylek, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The L.S. Starrett Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial report; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 5, 2009	/S/	Randall J. Hylek
		Randall J. Hylek Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of The L.S. Starrett Company, a Massachusetts corporation (the "Company"), does hereby certify, to such officer's knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended December 27, 2008 (the "Form 10-Q") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date	February 5, 2009	/S/ Douglas A. Starrett
		Douglas A. Starrett Chief Executive Officer
Date	February 5, 2009	/S/ Randall J. Hylek
		Randall J. Hylek Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to The L.S. Starrett Company and will be retained by The L.S. Starrett Company and furnished to the Securities and Exchange Commission or its staff upon request.