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, creating 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 over 75 years of manufacturing and import experience that enable it to be a low cost supplier.

Net sales for the quarter and nine months ended October 4, 2008, were down 32.8% and 20.0%, respectively, over the same periods last year due principally to lower sporting goods sales to Sears Holdings, one of the Company's mass retail customers. This decline in sales volume, combined with lower gross margin ratios, resulted in a significant decline in profitability. Operating income for the quarter was essentially breakeven, while a loss was recorded for the nine months ended October 4, 2008. During the third quarter, the Company recorded a one-time adjustment to the provision for income taxes of $1.1 million relating to a state tax audit assessment which the Company intends to protest. The result is a net loss for the quarter and nine months ended October 4, 2008.

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

                                          Three Months ended              Nine Months ended

                                      October 4,      October 6,      October 4,      October 6,
                                         2008            2007            2008            2007

Net revenue                                 100.0 %         100.0 %         100.0 %         100.0 %
Cost of products sold                        77.4 %          74.3 %          73.9 %          69.8 %

Gross margin                                 22.6 %          25.7 %          26.1 %          30.2 %
Selling, administrative and
general expenses                             22.4 %          16.1 %          27.6 %          22.3 %

Operating income (loss)                        .2 %           9.6 %          (1.5 )%          7.9 %

Consolidated Revenue and Gross Margin

Sporting Goods sales in the third quarter and nine months ended October 4, 2008 declined 39.8% and 26.2%, respectively, compared to the same periods last year primarily due to lost product placement at Sears Holdings which was the Company's largest mass-retail customer accounting for 26% of total sporting goods sales in fiscal 2007. Sporting Goods sales to other mass-retailers remained relatively unchanged. Due to the lost placement at Sears Holdings and weakening consumer confidence in the USA, the Company anticipates lower sales to mass-retailers in the fourth quarter of 2008 compared to 2007. In an effort to limit the Company's exposure to fluctuations in the mass-retail channel, the Company continues to pursue a strategy of expanding distribution to specialty retailers and dealers. Sales to this channel during the third quarter and nine months ended October 4, 2008 were down 19.3% and 8.5%, respectively. Anticipating a continued slow down in US consumer spending, specialty retailers and dealers are exercising extreme caution in buying inventory. The Company anticipates this trend to continue in the fourth quarter resulting in lower sales in fiscal 2008 compared to the prior year.

Office Product sales in the third quarter and nine months ended October 4, 2008 were down 7.8% and 5.2%, respectively, compared to the same periods last year. Approximately two-thirds of this decline is due to lower sales to office supply mass-retailers in the USA which are being negatively impacted by the worsening economy. The remaining third is due to a slow down in European sales due to slowing economies in Germany, France and Spain. The Company does not expect the market for Office Products to improve in the fourth quarter. As a result Office Product sales for fiscal 2008 will be lower than fiscal 2007.

The overall gross margin was negatively impacted in fiscal 2008 by a combination of factors. Excess manufacturing capacity in the Sporting Goods business resulted in significant unfavorable manufacturing overhead variances. To remedy this, the Company has initiated a plan to reduce the number of manufacturing facilities. The first step in this process, closing the Evansville, Indiana factory has been completed and the Company is evaluating further actions and consolidations. Other factors that are negatively impacting gross margins include rising raw material prices (steel, particle board and plastic resins); increasing costs of goods imported from China; and the weak US dollar. The Company has initiated efforts to mitigate these cost increases by raising selling prices. However, these actions will have a delayed effect due to the timing of customer catalogue pricing and sales contracts. Consequently, the gross margin achieved in the third quarter is expected to be indicative of what will occur in the fourth quarter.

Total selling, general and administrative expenses ("SG&A") declined 6.6% and 1.0% in the third quarter and nine months ended October 4, 2008, respectively, compared to the same periods last year. The primary reason for the decline in the third quarter is lower incentive compensation due to the Company's performance. During the third quarter the Company initiated efforts to reduce SG&A costs through personnel reductions. The full benefit of these efforts is expected in fiscal 2009.

Interest Expense and Other Income (Expense)

Interest costs in the third quarter and nine months ended October 4, 2008 were lower than the same periods last year due in part to the capitalization of interest related to the Company's ERP implementation project. The Company has also benefited from lower interest rates resulting from Federal Reserve rate cuts over the last 12 months.

Other income in the third quarter and nine months ended October 4, 2008 was less than the same periods last year due to declining royalties on licensed technology and a loss of $468 thousand on marketable securities the Company intends to sell in the fourth quarter to reduce bank debt. Royalty income will continue to decline as the Company increasingly competes with these licensees in the marketplace. The marketable securities sold were previously classified as "long term marketable securities held for sale" and were included in investments on the balance sheet.

Provision for Income Taxes

Shortly after the end of the third quarter of fiscal 2008, the Company received notice from a state tax agency that deductions claimed in prior years for factoring expenses were being denied. Although the Company plans to protest the audit assessment, it has recorded the potential tax of $1.1 million as an addition to uncertain tax positions under the caption of "Other non-current income tax liabilities" on the consolidated condensed balance sheet. Excluding the effect of this one-time charge, the effective tax rate for the nine months ended October 4, 2008 is roughly equal to the effective tax rate achieved in fiscal 2007. In the third quarter of fiscal 2007, the Company recorded a tax charge of $756 thousand associated with the repatriation of earnings from its European subsidiary.

Financial Condition and Liquidity

The following schedule summarizes the Company's total debt:


                                       October 4,     October 6,     December 29,
     In thousands                         2008           2007            2007


     Notes payable short-term         $     49,032   $     23,749   $       13,033
     Current portion long-term debt              -          3,479                -
     Long term debt                          2,729         27,700           19,135

     Total debt                       $     51,761   $     54,928   $       32,168

The cyclical nature of the Company's Sporting Goods business results in a buildup of bank debt as the Company prepares for the holiday shopping period. This debt is then paid down as the Company collects on these sales. The total bank debt at the end of the third quarter is consistent with historical trends and the Company expects that total bank debt at the end of 2008 will be comparable to the balance at the end of fiscal 2007. At the end of the second and third quarters the Company was in violation of two debt covenants: a leverage ratio and debt service ratio. The Company and its lender have reached an agreement in principle to amend the debt agreements to waive the covenant deficiencies. The amended debt agreements are expected to include revised pricing terms and a new expiration date of March 1, 2009. Accordingly, the Company has classified all amounts due under the loan agreements as current. The Company has begun negotiations with its primary lender to secure an asset based loan with a maturity greater than one year to replace the existing lending facilities.

The Company's working capital requirements are primarily funded from operating cash flows and revolving credit agreements with its primary bank. The Company's relationship with its primary lending bank remains strong and the Company expects to have access to sufficient levels of credit to continue its operations subject to the Company's ability to meet or obtain waivers of certain financial covenant requirements set forth in the loan documents as discussed below in Part II, Item 3. The Company believes it can secure additional or alternative funding should the need arise.