The Company's MD&A is comprised of significant accounting estimates made in the normal course of its operations, overview of the Company's business conditions, results of operations, liquidity and capital resources and contractual obligations. The Company is disclosing segment information for two segments. Composite Products is comprised of sales of golf shafts, hockey sticks and other composite products. The Company discontinued the sale of hockey sticks as of the second quarter ended June 30, 2007. As such, there are no sales of hockey sticks reflected in the Composite Products sales for 2008. Composite Materials is comprised of external sales of prepreg products in the forms of uni-tapes, fabrics and film adhesives along with contributions from its interest in Carbon Fiber Technology LLC ("CFT"). The Company sold its interest in CFT during the fourth quarter ended December 31, 2007 to its joint venture partner. As such, the Composite Materials numbers reported for 2008 do not reflect the benefit from owning CFT.

Significant Accounting Estimates

We prepared the consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.

We have several significant accounting estimates, such as; revenue recognition, accounts receivable and inventories, which were discussed in the 2007 Annual Report filed on Form 10-K, that are both important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments complex and difficult involve making estimates about the effect of matters that are inherently uncertain. During the six months ended June 30, 2008, we did not make any new accounting estimates that are considered significant accounting estimates nor were there any significant changes related to our significant accounting estimates previously made that would have a material impact on our consolidated financial position, results of operations, cash flows or our ability to conduct business.

Overview - Business Conditions

Composite Products

The Composite Products segment is mainly comprised of graphite golf shafts and, to a lesser extent, hockey sticks, (see discussion below regarding the Company's decision to exit the hockey business). The graphite shaft market consists of customized OEM production shafts, both premium and value and Aldila branded and co-branded shafts. The Company sells customized OEM production and co-branded shafts directly to its OEM customers and sells Aldila branded shafts through the OEM custom stock and custom fit programs and to distributors. In 2003, the Company re-emerged as an innovator in the branded segment of the business, in which shafts tend to sell at higher prices and have higher gross margins than the customized OEM production shafts sold to club manufacturers. The Company's recent branded shaft offerings are as follows:

Branded Shaft Offerings



†          Aldila NV† and NV† Line extensions.



†          Introduced in 2003, featuring the Company's exclusive Micro Laminate
Technology†.

†          Has had numerous Tour victories

†          The Company introduced NV† line extensions in 2004, including the
NVS†, NV ProtoPype†, Pink NV†, NV† Irons and NV† Hybrid shafts.

†          The Aldila NV† can be considered one of the most successful shaft
introductions ever.

†          VS ProtoTMand the VS ProtoTM Hybrid



†          Introduced and began shipping in 2006

†          High performance shaft featuring carbon nanotubes as well as
aerospace carbon fibers and the Company's exclusive high performance resin
systems.

†          Used by the winner of the 2006 U.S. Open.



†          DVS® and DVS® Hybrid



†          Introduced late in the fourth quarter 2007.

†          Features carbon nanotubes and an innovative tip design for extra kick
at impact - with optimum launch.

†          Used by Aldila advisory staff member, Paula Creamer, for 2 LPGA wins
to date in 2008.



†          VooDoo



†          Introduced on Tour only.

†          Becoming one of the most popular shafts on the PGA Tour.

†          Already used to win 5 events since its introduction.

†          Projected to begin shipping during the third quarter of 2008.

Hybrid shafts are included in branded shafts. The Company's branded hybrid shafts have been the most popular hybrid shafts on Tour for the last several years, often times outpacing the nearest competitor at a two to one margin. The Company's success in Branded Shafts has led to tremendous success on Tour over the past several years.

Tour Play

† 2006 Tour Play

† PGA, LPGA and Nationwide Tour professionals using Aldila shafts won a total of 32 Tour events.

†          2007 Tour Play



†          Tour professionals using Aldila shafts won 19 events on the PGA Tour
and nearly fifty percent of all the events on the Nationwide Tour.

†          Aldila shafts were also the most popular shafts for woods and hybrid
clubs at every Major Championship on the PGA Tour.

†          Aldila shafts were used by the winner of the Masters and the U.S.

† Aldila advisory staff member, Paula Creamer, won the SBS Open and led the U.S. Women's team to victory in the Solheim Cup playing her Pink NV® woods.

† Aldila was also the shaft of choice for the majority of players in both woods and hybrids at the 2007 PGA Club Professional Championship.

† At the 2007 U.S. Men's Amateur, Aldila was the leading shaft choice for hybrids.

† During the U.S. Public Links Championship, Aldila was the most popular wood and hybrid shaft.

† Aldila was also the leading shaft at the NCAA Division 1 Men's Championship in both woods and hybrids and the leading driver shaft at the NCAA Women's Championship.

† Aldila shafts were included on the Golf Digest Hot List and won Golf Tips Magazine's Technology Award.

†          2008 Tour Play



†          Aldila has enjoyed a great start to the 2008 Tour season.

†          On the PGA Tour, players using Aldila shafts have won 7 events

† Players using Aldila shafts have also won 7 events on the Nationwide Tour and 12 events on the Champions Tour.

† On the LPGA Tour we have won 16 of 21 events, and Paula Creamer, an Aldila advisory staff member, has won three events.

Our entire high performance line has done well with Tour players winning using our NV®, VS Proto™, DVS®, MOI Proto and VooDoo shafts.

Competition

The Company tries to maintain a broad customer base in both the OEM production shaft and branded shaft market segments and competes aggressively with foreign-based shaft manufacturers for OEM production shafts and branded shafts. However, the Company's sales have tended to be concentrated among a limited number of major club companies, thus making the Company's results of operations dependent on those customers, their continued willingness to purchase a significant portion of their shafts from the Company, and their success in selling clubs containing the Company's shafts to their customers. In 2007, net sales to Acushnet Company, Ping and Callaway Golf, represented 21%, 18% and 13% of the Company's net sales, respectively, and the Company anticipates that these companies will continue, collectively, to represent the largest portion of its sales in 2008.

Although it is generally difficult to predict in advance the success of any particular club or of any particular manufacturer, the Company believes that it is protected to some extent from normal periodic fluctuations in sales among the various golf club companies by virtue of the broad depth and range of its customer base. Golf club companies regularly introduce new clubs, frequently containing innovations in design. Sometimes these new clubs achieve dramatic success in the marketplace, thus increasing the overall volatility of club sales among the major companies. While the Company seeks to have its shafts represented on as many major product introductions as possible, it can provide no assurance that its shafts will be included in any particular "hot" club or that sales of a "hot" club that does not include the Company's shafts will not have a negative impact on the sales of those clubs that do. The Company's sales could also suffer a significant drop-off from period to period to the extent that they may be dependent in any period on sales of one or more "hot" clubs, which then tail off in subsequent periods and at the same time, new offerings fail to achieve a high level of new sales sufficient to exceed or replace the previous sales levels of "hot" clubs.

During the 1990's, the graphite golf shaft industry became increasingly competitive, placing extraordinary pressure on the selling prices of the Company's golf shafts and adversely affecting its gross profit margins and level of profitability. The competition on OEM production stock offerings was very tough, with selling price often times being the most critical factor. This had the effect of reducing the Company's average selling prices during the 1990s. Customers shifted away from branded shafts to customized OEM production shafts. As the Company re-emerged in 2003 in the branded shaft segment, the Company was able to achieve higher average selling prices. In late 2004, the Company began to offer its OEM customers co-branded shafts for their stock offerings. The introduction of co-branded shafts and the continued success in the branded segment had the effect of increasing the Company's net sales and average selling prices over prior years. The competition in the branded segment of the business has increased as there are a lot of good branded shafts in the marketplace, with the Company's considered amongst the best. The Company's average selling price decreased by approximately 13% for the six month period ended June 30, 2008 as compared to the comparable period for 2007. The majority of this is attributed to less branded and co-branded shafts in the Company's mix of shafts. As the Company's branded and co-branded shafts typically sell at higher selling prices than OEM production shafts, a significant change in product mix in any one period will have the effect of increasing or decreasing the average selling price of shafts sold. In addition, increases in carbon fiber prices passed on to its customers could also have the effect of increasing average selling prices in the future or reducing gross profit margin if the Company is unable to pass on such price increases to its customers.

The Company's response to the pricing pressure it faced during the 1990's, and continues to face, has been to vertically integrate, reduce its cost structure and to focus on continued penetration of the branded and co-branded shaft segments. The vertical integration began in 1994 when the Company started manufacturing prepreg, the principal raw material in the manufacture of graphite golf shafts, at its facility in Poway, California. (See Composite Materials). In addition to the Company's efforts to reduce its costs through vertical integration, the Company also reduced its cost structure by shifting more of its shaft production to lower cost labor markets, such as Mexico, China and in 2007, Vietnam.

In addition to golf shafts, the Company also manufactured hockey sticks for one customer. The Company began manufacturing and selling hockey sticks in 2002. The Company had not seen a significant increase in sales of hockey sticks and was not satisfied with the status of its hockey business during 2007 and discontinued this product line in the second quarter of 2007.

Composite Materials

The Composite Materials segment is comprised of external sales of prepreg, film adhesives, fabrics and other materials and the contribution provided by the Company's 50% owned interest in CFT. The Company sold its 50% interest in CFT to its joint venture partner on November 30, 2007. As such, the Composite Materials segment will not benefit from future contributions from CFT. The Company historically has not tracked inter-segment sales and has always looked at the contribution provided by Composite Materials based upon the external sales of materials. The Company records all shared costs to Composite Products and allocates certain costs for segment reporting, such as shipping, purchasing and other administrative costs based upon the net revenues of each segment. Costs that are specific to one segment are charged directly to the respective segment.

The Company began to manufacture composite materials in 1994. Initially, the prepreg produced was mainly consumed by the Composite Products segment. The Company's external sales of prepreg and other materials have increased over the past several years. Sales of prepreg as a percentage of net sales were 16% for the six month period ended June 30, 2008 versus 15% for the six month period ended June 30, 2007. The Company has spent a significant amount of money over the past several years to increase the capacity of its prepreg operations in support of its external sales of prepreg and Composite Products operations. Over the last several years, the Company has put in place two prepreg production lines, a second resin filmer and just completed the installation of a wide prepreg tape line during the first quarter of 2008. The prepreg lines add to the Company's capacity of prepreg to support both the Composite Materials and Composite Products segments. The additional resin filmer will support the Company's wide tape line and provide redundancy as the Company had previously only one resin filmer. In addition, the wide tape line will allow the Company to enter some markets it has previously not been able to get into.

The Company continues to look for opportunities to sell its prepreg and film adhesive products to other fabricators of products manufactured from composite materials. The Company has achieved some success in these areas and management believes that growth opportunities in these areas will continue to exist. In addition, management believes that vertical integration through its prepreg operation has been successful to date and is allowing the Company to maintain, or in some cases enhance, its competitive position with respect to the major United States golf club companies that are its principal customers.

In addition to vertical integration through prepreg, in 1998 the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber , which is a significant raw material used in the prepreg production process. On October 29, 1999, SGL Carbon Fibers and Composites, Inc. ("SGL") purchased a 50% interest in the Company's carbon fiber manufacturing operation. On November 30, 2007, SGL purchased the remaining 50% of CFT from the Company. As part of the sale, the Company signed a five year supply agreement with CFT, which allows but does not require the Company to purchase up to 900,000 pounds of carbon fiber in year 1 and 996,000 pounds of carbon fiber in years 2-5.

Results of Operations



Second Quarter 2008 Compared to Second Quarter 2007



Net Sales



                           For the three month period ended June 30,
                          2008            2007            Chg        % Chg
Composite Products    $     11,368    $     14,855    $     (3,487 )   (23 )%
Composite Materials          2,276           2,760            (484 )   (18 )%
Total Net Sales       $     13,644    $     17,615    $     (3,971 )   (23 )%

Net sales decreased by $4.0 million, or 23%, for the three month period ended June 30, 2008 ("2008 Quarter") as compared to the three month period ended June 30, 2007 ("2007 Quarter"). The decrease in sales was attributed to decreases in Composite Products and Composite Materials sales. The decrease in the Composite Products sales of $3.5 million, is mainly attributed to a change in product mix in 2008 as compared to 2007 and to a lesser extent a 6% decrease in shaft unit sales. The Company's average selling price of golf shaft sales decreased by 12% in the 2008 Quarter as compared to the 2007 Quarter. There were decreases in sales of branded and co-branded products, which were partially offset by an increase in sales of OEM products. A weak economy and decreased industry retail sales compared to last year impacted our sales. Our sales continued to be hurt by slowing sales of second selling season OEM shaft programs. With new shaft programs not set to begin delivery until late third quarter to several of our large customers, we have seen a continuing decline in sales as we

near the start up of these new programs. Branded golf and co-branded shaft sales decreased to 33% of Composite Products sales for the 2008 Quarter as compared to 53% for the 2007 Quarter. In addition, the 2007 Quarter benefited from $1.1 million of hockey stick sales as compared to zero for the 2008 Quarter. Composite Materials sales decreased by $484,000, or a 18% decrease. Composite Materials have increased to approximately 17% of the Company's consolidated net revenues for the 2008 Quarter as compared to 16% for the 2007 Quarter. The majority of our Composite Materials business is in the recreational products industry. Our customers' businesses have been impacted by the weak economy similar to what is impacting the Composite Products segment. We believe this to be temporary and our investments made in terms of capacity and personnel will resume their momentum in this segment later in the year if economic factors improve for our customer base.

Gross Profit



                           For the three month period ended June 30,
                         2008           2007             Chg        % Chg
Composite Products    $     1,994    $     4,776    $      (2,782 )   (58 )%
Composite Materials           623          1,156             (533 )   (46 )%
Total Gross Profit    $     2,617    $     5,932    $      (3,315 )   (56 )%

Total gross profit decreased by approximately $3.3 million, or 56% in 2008 Quarter as compared to the 2007 Quarter. The decrease was attributed to a decrease in Composite Products gross profit of $2.8 million and a decrease in Composite Materials gross profit of $533,000. The decrease in Composite Products gross profit was mainly attributed to the decrease in branded and co-branded sales in the 2008 Quarter as compared to 2007 Quarter. Branded and co-branded shafts typically sell at higher selling prices and contribute more to gross profit. Composite Products gross margin decreased to 18% for the 2008 Quarter as compared to 32% for the 2007 Quarter. Branded and co-branded sales decreased to 33% of Composite Products sales for the 2008 Quarter as compared to 53% for the 2007 Quarter. In addition, the 2007 Quarter benefited from approximately $260,000 of gross profit from sales of Hockey sticks, which was discontinued in 2007. The Company's Vietnam factory continues to ramp up and its production is expected to increase in the back half of the year. As the Company moves more of its manufacturing to Vietnam, it should help to offset the rising costs in China and the higher costs associated with Mexico, which should improve the Company's gross profit in the future. The Company recorded $184,000 for inventory reserves in the 2008 Quarter as compared to $260,000 for the 2007 Quarter. The Composite Materials gross profit decreased by approximately $533,000, or 46%, in the 2008 Quarter as compared to the 2007 Quarter. The decrease was mainly attributed to a decrease in contribution provided by the operations of CFT and to a lesser extent gross profit from sales of composite materials. The Company sold its remaining 50% interest in CFT to its joint venture partner during the fourth quarter of 2007, as such the Composite Materials segment will not benefit from CFT during 2008 as compared to 2007.

Operating (Loss)Income



                                      For the three month period ended June 30,
                                  2008            2007            Chg           % Chg
Gross profit                   $     2,617     $     5,932    $     (3,315 )        (56 )%

Selling, General &
Administrative ("SG&A)
Expense
Composite Products                   2,989           3,167            (178 )         (6 )%
Composite Materials                    403             489             (86 )        (18 )%
Total SG&A                           3,392           3,656            (264 )         (7 )%

Operating Income
Composite Products                    (995 )         1,609          (2,604 )       (162 )%
Composite Materials                    220             667            (447 )        (67 )%
Operating Income               $      (775 )   $     2,276    $     (3,051 )       (134 )%
Operating Margin                        (6 )%           13 %           (19 )%

Operating income decreased by approximately $3.1 million, or 134%, in the 2008 Quarter as compared to the 2007 Quarter. The decrease was attributed to a decrease in gross profit of $3.3 million, which was partially offset by a decrease in SG&A of $264,000. SG&A increased as a percentage of revenues to 25% in the 2008 Quarter as compared to 21% for the 2007 Quarter. SG&A expenses decreased by $264,000 in the 2008 Quarter as compared to the 2007 Quarter. Although the Company's SG&A decreased, the Company had an increase in advertising and promotion costs of 38% in the 2008 Quarter

as compared to the 2007 Quarter. The advertising and promotion programs were planned for the early part of the year in support of the DVS® shaft and the launch of the VooDoo shaft in the back half of the year. The Company anticipates that its advertising and promotion expense will be significantly reduced in the back half of the year. SG&A expense, excluding advertising and promotion, decreased by approximately 23% for the 2008 Quarter as compared to the 2007 Quarter. The decrease in SG&A was attributed to lower professional fees and a decrease in incentive expense for the 2008 Quarter as compared to the 2007 Quarter.

Other Income (Expense)



                                          For the three month period ended June 30,
                                         2008          2007             Chg        % Chg

Operating income                      $     (775 )  $     2,276    $      (3,051 )  (134 )%

Interest income                               42            250             (208 )   (83 )%
Interest expense                             (91 )            -              (91 )   100 %
Other, net                                    18            (32 )             50     156 %
Equity in earnings of joint venture            -             85              (85 )  (100 )%
Total other income                           (31 )          303             (334 )  (110 )%
Income before income taxes            $     (806 )  $     2,579    $      (3,385 )  (131 )%

Other Income decreased by approximately $334,000, or 110%, for the 2008 Quarter as compared to the 2007 Quarter. The majority of the decrease was attributed to the decrease in interest income, a decrease in equity in earnings of joint venture and an increase in interest expense. The decrease in interest income is attributed to having less cash invested in during the 2008 Quarter as compared to the 2007 Quarter. The decrease in cash invested was attributed to the special dividend the Company paid out during the first quarter of 2008. The increase in interest expense is attributed to interest associated with the Company's credit facility it placed during the first quarter of 2008.

Income Taxes



                                      For the three month period ended June 30,
                                  2008            2007            Chg           % Chg
Income before income taxes     $      (806 )   $     2,579    $     (3,385 )       (131 )%
(Benefit) provision for
income taxes                          (283 )           918          (1,201 )       (131 )%
Net income                     $      (523 )   $     1,661    $     (2,184 )       (131 )%
Effective tax rate                      35 %            36 %            (1 )%
Profit margin                           (4 )%            9 %           (13 )%

The Company recorded a benefit for income taxes in the amount of $283,000 in the 2008 Quarter as compared to a provision for income taxes of $918,000 for the 2007 Quarter. The Company records its provision for income taxes in interim periods based upon it estimated annual effective rate. The Company also records interest expense for its unrecognized tax benefits in the provision for income taxes. The amount of expense for the 2008 Quarter and 2007 Quarter was approximately $12,000 and $13,000, respectively.

Six Month Period Ended June 30, 2008 compared to the Six Month Period Ended June 30, 2007

Net Sales



                          For the six month period ended June 30,
                          2008            2007          Chg      % Chg
Composite Products    $     25,485    $     32,685    $ (7,200 )   (22 )%
Composite Materials          4,822           5,592        (770 )   (14 )%
Total Net Sales       $     30,307    $     38,277    $ (7,970 )   (21 )%

Net sales decreased by $8.0 million, or 21%, for the six month period ended June 30, 2008 ("2008 Period") as compared to the six month period ended June 30, 2007 ("2007 Period"). The decrease in sales was attributed to decreases in

Composite Products and Composite Materials sales. The decrease in the Composite Products sales of $7.2 million was mainly attributed to decreases in branded and co-branded shaft sales, which were partially offset by an increase in OEM shaft sales. The Company's average selling price of golf shaft sales decreased by 13% in the 2008 Period as compared to the 2007 Period on a 6% decline in unit sales. A weak economy and decreased industry retail sales compared to last year . . .