Results of Operations (continued)
   The following table sets forth, for the fiscal years ended September 30,
(i) the percentage relationship of certain items from the Company's statements
of income to net sales, and (ii) the year-to-year changes in these items:

                                                                                  Year-to-Year
                                             Percentage of Net Sales           Percentage Change
                                              2008               2007             2008 to 2007
Net sales                                      100.0 %           100.0 %                 (7 %)
Cost of sales                                   95.2              94.9                   (7 )

Gross profit                                     4.8               5.1                  (12 )

Selling, general and administrative
expenses                                         3.8               3.4                    4


Operating income                                 1.0               1.7                  (45 )
Interest expense                                -0.2              -0.4                  (49 )
Interest income and other income
(expense)                                        0.0               0.0                 NM

Income before income taxes                       0.8               1.3                  (43 )
Income tax expense                               0.3               0.5                  (48 )


Net income                                       0.5 %             0.8 %                (40 %)

The components of net sales and gross profit are summarized in the table below:

                                                 2008                         2007
                                                       % of                            % of
               Net Sales                Amount        Total             Amount        Total
                                                        (Dollars in millions)
  Contract manufacturing and printing   $  86.8             78 %     $       95.6         80 %
  Business imaging paper products          24.5             22               24.1         20

  Net sales                             $ 111.3            100 %     $      119.7        100 %




                                                        Margin                   Margin
                Gross Profit                Amount         %         Amount         %
     Contract manufacturing and printing   $    4.1           5 %   $    4.3           5 %
     Business imaging paper products            1.2           5 %        1.8           7 %

     Gross profit                          $    5.3           5 %   $    6.1           5 %

Fiscal Year Ended September 30, 2008 Compared to September 30, 2007 Net Sales for fiscal 2008 decreased $8.4 million, primarily due to a $8.9 million (9%) decrease in the Contract Manufacturing segment partially offset by a $0.5 (2%) increase in the Business Imaging paper products segment. Sales for Contract Manufacturing decreased compared to a year ago when the sector had the benefit of both stronger retail demand and two simultaneous new product launches. The decrease was also attributable to a decrease in consumer demand in the fourth quarter of fiscal 2008, which was not a factor in fiscal 2007. The Business Imaging segment sales increase was primarily due to a pass through of raw material increases to the segment's customers.
The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 32% of the Company's total sales in fiscal 2008, compared to 30% in fiscal 2007. The second customer accounted for 36% of the Company's total sales in fiscal 2008, compared to 41% in fiscal 2007.
Gross profit decreased $0.8 million (12%) and gross profit percentage remained unchanged at 5% compared to 2007. The margin in the Contract Manufacturing segment remained unchanged at 5% in 2008 compared to 2007 on a gross profit decrease of $0.2 million. The decrease in gross profit was due to a decline in toll revenue as it relates to the decrease in net sales mentioned above. Toll revenue is revenue which does not include a pass through of material costs. The Business Imaging segment experienced a decrease of $0.5 million in gross profit and a decrease in margin to 5% from 7% in 2007. This decrease was primarily due to rising raw material costs combined with strong price competition.
Selling, general and administrative expenses increased $158,000 in fiscal 2008 when compared to the same period in fiscal 2007, consistent with cost increases in general and an increase in sales staffing.
Interest expense decreased $0.3 million in 2008 from 2007 due to lower average debt outstanding and lower interest rates on borrowings.
Income taxes decreased $0.3 million mainly as a result of decreased profits. Basic and diluted net earnings per share were $0.13 for 2008 compared to $0.22 for 2007.
Selected Quarterly Financial Data
Not required for a smaller reporting company.

Liquidity and Capital Resources
Cash flows provided by operations were $4.9 million for fiscal 2008, and $2.8 million in 2007. Inventories decreased $1.4 million in 2008 as a result of efforts to reduce average on hand inventory levels for major raw material components and decreases in net sales. Accounts receivable decreased $3.5 million in 2008 resulting from decreased sales compared to 2007. Accounts payable decreased $3.4 million in 2008 compared to 2007, primarily due to the decrease in materials purchased. Depreciation was $2.2 million for fiscal 2008 and fiscal 2007. The Company's working capital position for the years ended September 30, 2008 and 2007 was $18.3 and $19.9 million, respectively, as a result of the change in components discussed above.
Cash used in investing activities was $1.1 million in fiscal 2008. Contract Manufacturing spent approximately $1.0 million on capital expenditures throughout the year to support ongoing operational needs and for payments on a canister line and associated packaging equipment to support the Company's growth in the expanding disposable nonwovens wipes market. As of December 18, 2008 the Company expects to spend approximately $0.6 million to complete the purchase of the canister line and associated packaging equipment. In Business Imaging, the amount spent on capital expenditures was $138,000.
Cash used in financing activities was $3.7 million in fiscal 2008 and $0.7 million in fiscal 2007, resulting primarily from repayment of outstanding indebtedness. In February 2008, the Company's Board of Directors approved a program for open market stock repurchases through December 31, 2008 for up to 100,000 shares of its common stock at prevailing market prices after concluding that the Company's cash and debt position would enable these purchases without impairment to the Company's capital. On October 15, 2008, the Company's Board of Directors approved an extension of its February 2008 stock repurchase program through June 2009 and an increase in the number of shares from 100,000 to 200,000. A total of 78,940 shares were purchased for an aggregate purchase price of $478,000 under the plan through September 30, 2008. As of December 18, 2008, a total of 157,697 shares were purchased under the plan for an aggregate purchase price of $764,000.
The Company's primary need for capital resources is to finance inventories, accounts receivable, and capital expenditures. At September 30, 2008, cash recorded on the balance sheet was $68,397.
The Contract Manufacturing segment's sales are made pursuant to project-specific purchase orders as well as contract service agreements with multi-year terms. Sales under such contract service agreements are typically derived from customer directed purchase orders based on unit volume projections supplied by the customers and demand generated by the customers' consumer bases. The Company has significant contracts with new and existing customers for both printing and Contract Manufacturing. One of these customers, a multinational consumer products company, accounted for approximately 30% of total sales in fiscal 2007 and 32% of total sales in fiscal 2008. The contract with this customer expires in June 2011. In fiscal 2006, the Company started up two new production lines producing over 50 SKU's under a new contract. This was the single largest and most complex start-up ever undertaken by Tufco. This customer accounted for approximately 41% of total sales in fiscal 2007 and 36% of total sales in fiscal 2008. The contract with this customer expires April 2009. The Company is currently negotiating an extension to the manufacturing contracts with this customer. However, because the Company's contract revenue agreements described above generally do not have minimum purchase requirements, the revenues attributable to the contracts are subject to normal business fluctuations.
On May 20, 2004, the Company entered into a credit agreement. The credit agreement, as amended, includes a $14.0 million revolving line of credit facility as well as a $1.0 million swing line available for overdrafts and expires on May 18, 2010. Borrowings under the line of credit are made under the base rate account or the Eurodollar account. Interest on amounts borrowed under the base rate account is calculated based on the greater of the Federal Funds Effective Rate plus 1/2 of 1% or the Prime Rate on the date of the borrowing. Interest on amounts borrowed under the Eurodollar account is calculated based on LIBOR. As of September 30, 2008, the Company had $1.0 million outstanding under the base rate account at a rate of 5.00%, $1.0 million outstanding under one Eurodollar account at a rate of 3.74% and $1.0 million outstanding under a second Eurodollar account at a rate of 4.44%. The credit agreement also includes a commitment to issue commercial and standby letters of credit not to exceed $1.0 million. The Company had no amounts outstanding under the letter of credit commitment as of September 30, 2008. The Company had $11.0 million available under the line of credit as of September 30, 2008. The credit agreement contains certain restrictive covenants, including requirements to maintain a minimum tangible net worth, after tax net income and restrictions

Liquidity and Capital Resources (Continued) on maximum allowable debt, stock purchases, mergers, and payment of dividends. At September 30, 2008, the Company was in compliance with all of its covenants under the credit agreement. On December 18, 2008, the Company had approximately $10.5 million available under its revolving credit and swing lines.
Consistent with the sales concentration previously discussed, amounts due from two multinational consumer products customers represent 58% and 70% of total accounts receivable at September 30, 2008 and 2007, respectively.
Management believes that the Company's operating cash flow, together with amounts available under its credit agreement, are adequate to service the Company's long-term obligations as of September 30, 2008 and any budgeted capital expenditures, assuming the Company meets its business plan.
The Company intends to retain earnings to finance future operations and expansion and does not expect to pay any dividends within the foreseeable future. In addition, pursuant to the credit agreement, the Company's primary lenders must approve the payment of any dividends over $2.0 million. Inflation
In fiscal years 2008 and 2007, the impact of inflation was minimal on the Company's inventory and net income. Management believes that the Company is generally successful in eventually passing these fluctuations in raw material prices to its customers through increases or decreases in the selling price of the Company's products, although the timing of selling price increases may lag behind cost increases. Prior to these periods, the impact of inflation has been minimal on the Company's inventory and net income. Credit Environment
The credit markets continue to be volatile and experience liquidity shortages due to the instability in the lending industry and overall downturn in the economy. The Company does not engage in any business activities in the lending industry. The Company believes it has sufficient liquidity under its credit agreement at variable interest rates and from cash provided by operations. Sales are concentrated in the consumer staples markets, which are generally considered more stable during uncertain times. However, if these customers continue to curb investment in more discretionary products as a result of the decline in economic conditions, it is possible revenues could decline further. Off Balance Sheet Arrangements
The Company has no Off Balance Sheet Arrangements (as defined in Item 303
(a)(4) of Regulation S-K).

Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The reported financial results and disclosures were determined using significant accounting policies, practices and estimates as described below. We believe the reported financial disclosures are reliable and present fairly, in all material respects, the financial position and results of operations for the Company.
Financial statement preparation requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual amounts could differ from the amounts estimated. Differences from those estimates are recognized in the period they become known.
Revenue Recognition- The Company recognizes revenue when title and risk of loss transfers to the customer and there is evidence of an agreement and collectability of consideration to be received is reasonably assured, all of which generally occur at the time of shipment. Sales are recorded net of sales returns and allowances. Shipping and handling fees billed to customers are recorded as revenue and costs incurred for shipping and handling are recorded in cost of sales. Amounts related to raw materials provided by customers are excluded from revenue and cost of sales.
Accounts Receivable- Management estimates allowances for collectability related to its accounts receivable balances. These allowances are based on the customer relationships, the aging and turns of accounts receivable, credit worthiness of customers, credit concentrations and payment history. Management's estimates include providing for 100 percent of specific customer balances when it is deemed probable that the balance is uncollectable. Management estimates the allowance for doubtful accounts by analyzing accounts receivable balances by age, applying historical trend rates to the most recent 12 months' sales, less actual write-offs to date. Although management monitors collections and credit worthiness, the inability of a particular customer to pay its debts could impact collectability of receivables and could have an impact on future revenues if the customer is unable to arrange other financing. Management does not believe these conditions are reasonably likely to have a material impact on the collectability of its receivables or future revenues.
Management estimates sales returns and allowances by analyzing historical returns and credits, and applies these trend rates to the most recent 12 months' sales data to calculate estimated reserves for future credits. Actual results could differ from these estimates under different assumptions.
Inventories- Inventories are carried at the lower of cost or market, with cost determined under the first-in, first-out (FIFO) method of inventory valuation. The Company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization. A large portion of the Company's inventory is saleable to multiple customers and a portion of the inventory is manufactured to specifications provided by original equipment manufacturers and is not subject to rapid technological change.
Goodwill- Goodwill represents the excess of cost over fair value of net assets acquired in business combinations. In order to calculate goodwill, management applies judgment in determining the reporting units, which represent distinct parts of the business. The annual goodwill impairment analysis involves estimating the fair value of a reporting unit and comparing it with its carrying amount. If the carrying value of the reporting unit exceeds its fair value, additional steps are required to calculate a potential impairment loss. Calculating the fair value of the reporting unit requires significant estimates and long-term assumptions. Any changes in key assumptions about the business and its prospects, or any changes in market conditions, interest rates or other externalities, could result in an impairment charge. Management has continued to review the carrying values of goodwill for recoverability based on fair market value estimated using estimated future cash flows and prices of comparable companies in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". The fair value of the reporting units was estimated using a combination of valuation techniques, including the expected present value of future cash flows and prices of comparable businesses.
In accordance with SFAS No. 144, "Accounting for the Impairment for Disposal of Long-Lived Assets", the Company evaluates the recoverability of the recorded amount of long-lived assets whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. If an asset is determined to be impaired, the impairment to be recognized is measured as the amount by which the

Critical Accounting Policies (Continued) recorded amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the recorded amount or fair value less cost to sell. We determine fair value using discounted future cash flow analysis or other accepted valuation techniques.
Additional information on the Company's accounting policies is set forth in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report as referenced to the Appendix to this Report. Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis for which delayed application is permitted until fiscal years beginning after November 15, 2008. The Company has determined that the adoption of SFAS No. 157 did not have a material effect on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. Under SFAS No. 159, a business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not elected to adopt SFAS No. 159.
In June 2007, the FASB ratified EITF No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities" ("EITF No. 07-3"). EITF No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF No. 07-3 is effective, on a prospective basis, for financial statements issued for fiscal years beginning after December 15, 2007. The Company has determined that the adoption of EITF No. 07-3 did not have a material effect on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) revised the requirements of SFAS No. 141 related to fair value principles, the cost allocation process and together with other revisions from past practice. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Any business combination in the future will have an effect on the Company's consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 160 amends ARB 51, "Consolidated Financial Statements", and requires all entities to report noncontrolling (minority) interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders' equity. SFAS No. 160 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions. Further, SFAS No. 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company has determined that the adoption of SFAS No. 160 will not have a material effect on its consolidated financial statements.

Recently Issued Accounting Standards (Continued) In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and expands SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", to provide users of financial statements with an enhanced understanding of the use of derivative instruments, accounting for derivative instruments and related hedged items, and the effect on an entity's financial position, financial performance, and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, as well as disclosures about credit-risk related to contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for the Company's first fiscal year beginning after November 15, 2008. The Company has determined that the adoption of SFAS No. 161 will not have a material impact on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162"), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The FASB does not expect that this statement will result in a change in current practice. SFAS No. 162 is effective for all pronouncement and applications of accounting principles issued after March 15, 1992. The Company has determined that the adoption of SFAS No. 162 did not have a material effect on its consolidated financial statements.