The following section should be read in conjunction with Item 1: Business; Item 1A: Risk Factors; Item 6: Selected Financial Data; and Item 8: Financial Statements and Supplementary Data.

Forward-Looking Statements

This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to, the impact of competitive products and pricing, product demand and market acceptance, new product development, the continuation and development of key customer and supplier relationships, Escalade's ability to control costs, general economic conditions, fluctuation in operating results, changes in the securities market and other risks detailed from time to time in Escalade's filings with the Securities and Exchange Commission. Escalade's future financial performance could differ materially from the expectations of management contained herein. Escalade undertakes no obligation to release revisions to these forward-looking statements after the date of this report.

Overview

Escalade, Incorporated ("Escalade" or "Company") manufactures and distributes products for two industries: Sporting Goods and Office Products. Within these industries the Company has successfully built a market presence in niche markets. This strategy is heavily dependent on expanding the customer base, barriers to entry, brand recognition and excellent customer service. A key strategic advantage is the Company's established relationships with major customers that allow the Company to bring new products to the market in a cost effective manner while maintaining a diversified product line and wide customer base. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enable it to be a low cost supplier.

                                         2007     2006      2005
                      --------------- - ------ - ------- - ------- -

                      Net revenue
                      Sporting Goods    -5.1 %    13.0 %   -14.6 %
                      Office Products    1.9 %   -12.2 %   -18.0 %
                      Total             -3.1 %     4.4 %   -15.8 %

                      Net Income         9.0 %   -34.2 %    57.9 %

Results of Operations

The following schedule sets forth certain consolidated statement of income data as a percentage of net revenue for the periods indicated:

                                                       2007      2006      2005
       -------------------------------------------- - ------- - ------- - ------- -
       Net revenue                                    100.0 %   100.0 %   100.0 %
       Cost of products sold                           70.8 %    72.0 %    69.7 %
                                                      -----     -----     -----
       Gross margin                                    29.2 %    28.0 %    30.3 %
       Selling, administrative and general expenses    20.8 %    20.6 %    19.8 %
       Restructuring costs                              0.0 %     0.0 %    -0.3 %
       Amortization                                     1.4 %     1.2 %     0.6 %
                                                      -----     -----     -----
       Operating income                                 7.0 %     6.2 %    10.2 %
                                                      -----     -----     -----

Consolidated Revenue and Gross Margin

Continued sales declines to mass market retail customers in the Sporting Goods business resulted in an overall decline of 3% in consolidated net revenues for 2007 compared to 2006. These declines in the mass market retail channel offset gains in the specialty retail and dealer channels. Revenues from the Office Products business increased 2% in 2007 compared to 2006 due principally to changes in foreign exchange rates.

The overall gross margin in 2007 increased in comparison to 2006 due to expansion of the Sporting Goods business into the specialty retail and dealer markets which have higher gross margin ratios. The gross margin ratio in the Office Products business declined slightly in 2007 compared to last year, primarily due to the effect of changing foreign exchange rates on the cost of goods sold in North America.

Consolidated selling, general and administrative expenses ("SG&A") declined slightly in 2007 compared to 2006 due principally to lower sales; as a ratio of net revenue, SG&A costs were relatively unchanged from the prior year. Lower SG&A costs in the Office Products business were offset by slightly higher costs in the Sporting Goods business and corporate administration. The reduction in SG&A costs in the Office Products business is associated with cost reductions designed to bring European operating costs in line with current revenues. The increase in SG&A costs associated with the Sporting Goods business reflects higher selling costs associated with expansion into the specialty retail and dealer channels. Corporate administration costs were higher primarily due to professional fees associated with selecting an integrated global information system and compliance task; audit and tax.

Other Income

Other income increased in 2007 compared to 2006 as a result of a one-time sale of rights to license potential future intellectual property. The transaction generated a gain of $1.5 million.

Provision for Income Taxes

The effective income tax rate in 2007 was higher relative to 2006 primarily due to taxation on repatriated earnings from the Company's foreign operations. Excluding the effects of this repatriation, the effective tax rate for 2007 would have been 29.6% compared to 25.9% and 32.9% in 2006 and 2005, respectively. The Company expects future effective tax rates to approximate the effective tax rate achieved in 2007 excluding the effect of repatriated earnings.

Sporting Goods

Net sales, operating income, and net income for the Sporting Goods business
segment for the three years ended December 2007 were as follows:


                  In Thousands            2007        2006        2005
                  ---------------- - --------- - --------- - --------- -

                  Net Revenue        $ 129,788   $ 136,733   $ 120,996
                  Operating income       7,745       7,835      12,288
                  Net income             5,341       3,562       7,386

Net revenue declined 5% in 2007 compared to 2006, but remains slightly more than the level achieved in 2005. Sales to the Company's mass market retail customers declined roughly 14% in 2007 compared to 2006 and reflect two factors: a general slowdown in the US economy which is adversely affecting mass retailers in general and a continued industry wide decline in consumer demand for soccer and hockey game tables. The Company continues to aggressively pursue opportunities with its mass market retail customers, but sales to this channel are expected to continue to decline. To counteract this trend, the Company continues to pursue a strategy of expanding certain product offerings and distribution through specialty retailers and dealers. Sales to these channels increased 14% in 2007 compared to 2006 and now comprise 38% of total revenues compared to 31% last year. Growth anticipated in the specialty retail and distributor channels are not expected to completely overcome expected significant declines in mass market retail channels, including diminished sales to Sears. Consequently the Company anticipates total 2008 sales for the Sporting Goods segment to be relatively unchanged from 2007.

Sales in 2006 were higher than 2005 due primarily to acquisitions completed during the first half of 2006 which increased distribution to the specialty retail and distributor channels. Sales to mass market retail customers were relatively unchanged in 2006 compared to 2005.

The gross margin ratio in 2007 increased slightly compared to 2006, but continued to be less than the ratio achieved in 2005 due to continued pricing pressures from mass market retailers. Because sales to the specialty retailer/dealer channel have higher gross margins, the gross margin ratio in the Sporting Goods business is expected to continue to improve as sales to this channel become a larger part of total product mix. As a result, operating income as a percentage of net revenue increased to 5.9% in 2007 compared to 5.7% in 2006. Management anticipates this trend to continue as sales to the specialty retail/dealer channel increase.

Office Products

Net sales, operating income, and net income for the Office Products business
segment for the three years ended December 29, 2007 were as follows:


                   In Thousands           2007       2006       2005
                   ---------------- - -------- - -------- - -------- -

                   Net Sales          $ 55,788   $ 54,732   $ 62,319
                   Operating income      8,809      8,131      8,679
                   Net income            5,617      5,095      5,683

Sales in the Office Products business increased 1.9% in 2007 compared to 2006 primarily due to changes in foreign exchange rates. Excluding the effect of changing foreign exchange rates, 2007 sales were essentially unchanged from 2006. Declining sales to traditional office products retailers were offset by increased sales to specialty machine dealers and increased demand for high security and heavy duty shredders. Management anticipates further declines in sales to office product retailers as a result of the slowing US economy. However, new product launches and an expanding presence in machine dealers is expected to offset these shortfalls resulting in a modest increase in 2008.

Sales in 2006 were lower than 2005 due to product rationalizations designed to eliminate unprofitable products and customers to improve profitability.

Profitability in the Office Products segment increased again in 2007 as evidenced by the ratio of operating income to net sales which increased from 13.9% in 2005, to 14.9% in 2006 and 15.8% in 2007. The primary reasons for this improving trend in profitability are the product rationalizations and cost reduction programs that were completed in 2006. Product rationalizations allowed the Company to eliminate unprofitable products and customers, while cost reduction programs aligned operating expenses with current revenue levels.

Financial Condition and Liquidity

Cash flows and financial strength continue to be strong as a result of continued profitability. The current ratio, a basic measure of liquidity (current assets divided by current liabilities), was unchanged in 2007 compared to 2006. Total accounts receivable are down at the end of 2007 as a direct result of a lower sales volume. Year end inventory balances are consistent with prior years and current sales trends.

As of December 29, 2007, total debt to banks, including short-term and long-term, was substantially unchanged compared to the prior year. Cash from operations in 2007, funded acquisitions totaling $4.2 million; property, plant and equipment investments of $2.4 million; the payment of dividends totaling $2.9 million; and the repurchase of common stock totaling $3.4 million. As a percentage of stockholders' equity, total bank debt was 35% at December 29, 2007 compared to 38% at December 30, 2006.

Spending on property, plant and equipment in 2007 totaled $2.4 million compared to $2.7 million in 2006. Depreciation expense, $3.2 million, was unchanged in 2007 compared to 2006. Capital expenditure levels in 2007 were consistent with prior years. In 2008, the Company expects capital expenditures to be approximately $4.5 million higher due to costs associated with the implementation of a global integrated information system.

The Company's working capital requirements are primarily funded through cash flows from operations and revolving credit agreements with its bank. During 2007 the Company's maximum borrowings under its primary revolving credit lines totaled $52.4 compared to $55.4 million in 2006 and the Company met all its debt covenants. The over all effective interest rate in 2007 was 6.7% which was consistent with the effective rate of 6.4% in 2006.

On March 4, 2008, The Company announced the payment of an annual dividend of $0.25 per share to all shareholders of record on March 14, 2008, payable on March 21, 2008.

New Accounting Pronouncements

Refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements.

Off Balance Sheet Financing Arrangements

The Company has no financing arrangements that are not recorded on the Company's balance sheet.

Contractual Obligations

The following schedule summarizes the Company's contractual obligations as of
December 29, 2007:


Amounts in thousands                                        Payments Due by Period
                                 ----------------------------------------------------------------------------
                                              Less than 1                                        More than 5
Contractual Obligations           Total          year          1 - 3 years      3 - 5 years         years
----------------------------- -- -------- -- ------------- -- ------------- -- ------------- -- -------------

Long-term debt                   $ 32,168    $           -    $      13,033    $      16,435    $       2,700
Future interest payments (1)        8,575            2,050            3,254            1,111            2,160
Future interest payments
(receipts) under the Interest
rate swap agreement (2)              (247 )           (174 )            (73 )              -                -
Operating Leases                    1,913            1,032              729              152                -
Minimum payments under
royalty and license
agreements                            742              642                -              100                -
                                 - ------    -- ----------    -- ----------    -- ----------    -- ----------
Total                            $ 43,151    $       3,550    $      16,943    $      17,798    $       4,860
                                 - ------    -- ----------    -- ----------    -- ----------    -- ----------

Notes:

(1) Assumes that the Company will not increase borrowings under its long-term credit agreements and that the effective interest rate experienced in 2007 (6.7%) will continue for the life of the agreements.

(2) Assumes that the LIBOR rate (5.0%) at December 29, 2007 will remain unchanged for the term of the swap agreement.

Critical Accounting Estimates

The methods, estimates and judgments used in applying the Company's accounting policies have a significant impact on the results reported in its financial statements. Some of these accounting policies require difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The most critical accounting estimates are described below and in the Notes to the Consolidated Financial Statements.

Product Warranty
The Company provides limited warranties on certain of its products, for varying periods. Generally, the warranty periods range from 90 days to one year. However, some products carry extended warranties of seven-year, ten-year, and lifetime warranties. The Company records an accrued liability and expense for estimated future warranty claims based upon historical experience and management's estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and expensed in the current year. To the extent there are product defects in current products that are unknown to management and do not fall within historical defect rates, the product warranty reserve could be understated and the Company could be required to accrue additional product warranty costs thus negatively affecting gross margin.

Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due between 30 and 60 days after the issuance of the invoice. Accounts are considered delinquent when more than 90 days past due. Delinquent receivables are reserved or written off based on individual credit evaluation and specific circumstances of the customer. To the extent that actual bad debt losses exceed the allowance recorded by the Company, additional reserves would be required which would increase selling, general and administrative costs.

Advertising Subsidies
The Company enters agreements with certain retailers to pay for direct advertising programs and/or provide in-store display units. These agreements are not based on retailer purchase volumes and do not obligate the retailer to continue carrying the Company's products. The Company determines the value of the advertising services based on its own research and history of providing such services. The Company expenses these costs in the period in which they are incurred as a selling expense.

CO-OP Advertising
The Company offers co-operative advertising allowances to certain retailers to encourage product promotions. These agreements are typically based on a percentage of retailer purchases up to a maximum allowance and the Company is never directly involved with the media provider. The Company accrues the estimated cost of these programs based on the sales volume of the retailer and historical trends. As costs are accrued they are recorded as a reduction in sales. To the extent that actual co-operative advertising costs exceed the Company's estimates, additional co-operative advertising allowances would be required which would reduce net revenues.

Volume Rebates
The Company has various rebate programs with certain retailers that are based on purchase volume. Typically these programs are based on achieving specified sales volumes and the rebate is calculated as a percentage of purchases. Based on the terms of the agreement, purchase levels and historical trends the Company accrues the estimated cost of these programs and records the same as a reduction in sales. To the extent that actual rebate program costs exceed the Company's estimates, additional rebate program allowances would be required which would reduce net revenues.

Catalog Allowances
A number of large office supply dealers operate through catalogs distributed to businesses throughout the country. Product content is decided by the dealer each time a new catalog is issued; typically once a year. Catalog allowances are required by the dealer as an inducement to include the Company's products. The allowance is based on a fixed cost per page and/or a percentage of purchases by the dealer. The fixed portion of the allowance is often paid when the catalog is distributed and is recognized when incurred and the variable portion is accrued based on dealer purchases and historical trends. Catalog allowances are recorded as a reduction in sales. To the extent that actual catalog costs exceed the estimated costs associated with variable agreement provisions, additional catalog allowances would be required which would negatively impact net revenues.

The Company cannot accurately determine the precise effects of inflation; however, there were some increases in sales and costs due to inflation in 2007. The Company attempts to pass on increased costs and expenses through price increases when necessary. The Company is working on reducing expenses; improving manufacturing technologies; and redesigning products to keep these costs under control.

Capital Expenditures

As of December 29, 2007, the Company had no material commitments for capital expenditures. However, in the first quarter of 2008, the Company initiated a project to implement a global integrated information system. In 2008, the Company expects to incur capital expenditures related to this project of $4.5 million.