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 did not have any off balance sheet arrangements as of December 31, 2008 or 2007. The Company's significant accounting estimates identified are, revenue recognition, accounts receivables, inventory valuation and income taxes. The Company is disclosing segment information for two operating segments, Composite Products and Composite Materials. Composite Products is comprised of sales of golf shafts, hockey sticks and other composite products. 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 CFT through 2007.

Critical Accounting Policies and Significant Accounting Estimates

The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America. As such, the Company is 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. The significant accounting policies, which the Company believes are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

Revenue Recognition

The Company recognizes revenue from product sales at the time of shipment and passage of title. We also offer certain of our customers the right to return shafts for breakage within a limited time after delivery. We track such shaft breakage returns, and we record a provision for the estimated amount of such future returns, based on historical experience and any notification we receive of pending returns at the time sales are made. The Company believes that any shafts returned for breakage will be returned within three years of the initial sale of the shaft. The Company estimates in regards to total actual returns, that 50% will be returned in the first year after sale, 30% in the second year after sale and the remaining 20% in the third year after sale, assuming a mid-year convention. The Company's breakage return rate has been between 0.17% and 0.91% (breakage returns divided by sales dollars) for the past ten years. The Company has historically utilized a four-year moving average of the breakage return rate to record its estimated liability. The four-year average utilized in the accrual estimate as of December 31, 2008 is 0.24%. The Company's breakage return rate has declined over the past years. The highest four-year average over the past ten years has been 0.60%. If the Company were to use 0.60% in estimating its liability as of December 31, 2008, it would have the effect of increasing the liability by approximately $488,000, which would be recorded in cost of goods sold. While breakage returns have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Any significant increase in product failure rates and the resulting returns could have a material adverse impact on our operating results for the period or periods in which such returns materialize.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. In addition, the current economic environment has changed the landscape of credit worthiness worldwide, with more and more companies forced to stretch their resources. The Company believes that its focus in this area should help to identify and prevent problem accounts before they become significant. However, since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results. The Company estimates its allowance for doubtful accounts on a monthly basis, by reviewing all amounts owed to the Company and focusing on those amounts that are greater than 60 days past due. The Company reviews the customers that have amounts greater than 60 days past due and where appropriate, establishes a reserve for the receivable amount that Company deems to be at risk in collecting. As of December 31, 2008, the Company estimated this amount to be approximately $63,000. If the Company were to reserve for the total amount greater than 60 days past due, it would increase the allowance by approximately $111,000, which would be recorded in administrative expense.

Inventories

We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Management of the Company, including but not limited to, representatives from manufacturing, sales, accounting and officers review the inventory reserve methodology quarterly and when appropriate, establish additional reserves or reduce existing reserves.

The Company's reserve methodology consists of the following: reviewing on hand inventories of all of its finished goods shafts and comparing inventories to historical sales trends and anticipated sales forecasts. A 100% reserve is established for all shafts that are deemed to be obsolete. In some cases a reserve of 50% or 25% may be established to discount the product to its estimated realizable value. Raw materials are reviewed based upon estimated future production and when appropriate, reserves are established. Shafts that are designated for rework (parts that need additional work) are reviewed and when appropriate reserves are established. The final analysis is to review inactive inventory, and apply reserves to parts that were not included in the other analyses and have been inactive in the system for a period of twelve months. The Company's average reserve percentage compared to gross inventory has been approximately 9% for the past five years. In the past five years, the highest reserve percentage was approximately 10% and the lowest reserve percentage was approximately 8%. The Company's reserve percentage as of December 31, 2008 is 9%. See the estimated impact below to cost of goods sold, utilizing the different reserve rates above:

            (Amounts below in thousands)      Highest    Average     Lowest
            Gross inventory as of 12/31/08    $ 12,750   $ 12,750   $ 12,750
            Reserve rate                          10.4 %      8.8 %      7.7 %

            Estimated reserve                    1,325      1,127        983
            Recorded Reserve as of 12/31/08      1,167      1,167      1,167

            Impact to costs of goods sold     $    158   $    (40 ) $   (184 )

In the future, if our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although we make every effort to ensure that our forecasts of future product demands are reasonable, any significant unanticipated changes in demand could have a significant impact on the value of our inventory and our reported operating results. The Company continues to look at ways of minimizing its inventory levels and to be more efficient. As the Company continues to try to reduce its carrying levels of its work-in-process and finished goods inventory, it should have the effect of further reducing the amount of its inventory reserves.

Income Taxes

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company adopted the provisions of FIN 48 on January 1, 2007, and has analyzed filing

positions in all of the federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. As of the date of adoption, the Company had approximately $754,000 of unrecognized tax benefits including interest. For the period ended December 31, 2008, the Company recorded an additional net unrecognized tax benefit of $661,000 including interest. The Company attempts to identify these positions at the end of each year based upon the more than likely or not threshold established in FIN 48. The Company files its income taxes for the previous year in the Fall of the following year. At times the estimates made at the end of the year may change when the Company files its income tax return. The Company attempts to mitigate this; however there can be no certainty that there will not be adjustments to the Company's estimates that have previously been made. The Company had $1.6 million and $964,000 in unrecognized tax benefits and interest as of December 31, 2008 and 2007, respectively.

Overview-Business Conditions

Composite Products

The Composite Products segment is mainly comprised of graphite golf shafts and, to a lesser extent, hockey sticks, (the Company exited the hockey business in 2007). 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. The Company's recent branded shaft offerings are as follows:

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º Aldila NV® and NV® Line extensions.

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

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º Has had numerous Tour victories.

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

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

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º VS Proto™ and the VS Proto™ Hybrid

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º Introduced and began shipping in 2006.

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

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

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º DVS® and DVS® Hybrid

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º Introduced late in the fourth quarter 2007.

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

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º Used by Aldila advisory staff member, Paula Creamer, for 4 LPGA wins to date in 2008.

º •
º VooDoo®

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º Initially introduced on Tour only during the first quarter of 2008.

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

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º Already used to win 8 events in 2008.

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º Began shipping to customers in 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.

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º 2007 Tour Play

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

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º Aldila shafts were also the most popular shafts for woods and hybrid clubs at every major championship on the PGA Tour.

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º Aldila shafts were used by the winner of the Masters and the U.S. Open as well as the winner of the World Golf Championship-Accenture Match Play Championship.

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º 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.

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

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

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

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º 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.

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

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º 2008 Tour Play

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º Aldila enjoyed a great 2008 Tour season.

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º On the PGA Tour, players using Aldila shafts have won 13, events including the World Golf Championship-CA Championship and the Verizon Heritage by Aldila advisory staff member, Boo Weekley.

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º Players using Aldila shafts have also won 13 events on the Nationwide Tour and 15 events on the Champions Tour.

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º On the LPGA Tour we have won 20 events, and Paula Creamer, an Aldila advisory staff member, won four events.

Our entire high performance line has done well with Tour players winning using our NV®, VS Proto™, DVS® 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 2008, net sales to Ping, Acushnet Company and Callaway Golf, represented 21%, 16% and 15% 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 2009.

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. This is especially true in the premium branded driver programs. If the Company does not participate in these programs, it could have an adverse effect on the Company's revenues and average selling prices. Average selling prices of the Company's shafts have varied greatly over the years based upon programs it participates in, mix of shafts, wood vs. irons, competition, retail inventory situations or a shortage of raw materials available. The Company's average selling price decreased in 2008 by 7% as compared to 2007. See the graph of the Company's average selling price changes below.

[[Image Removed: GRAPHIC]]

The Company believes that some of the success it enjoyed in 2005 and 2006 was attributed to a shortage of carbon fiber. The Company believes that some of its competitors are negatively impacted when there is a shortage of carbon fiber, which can create a shortage of prepreg. Although, the Company does not have ownership in a carbon fiber plant any longer, it still produces the majority of its carbon fiber prepreg, which the Company believes is a competitive advantage. In the midst of this

pricing pressure that the Company has faced over the years, the Company has attempted to reduce its cost structure in order to be competitive. In order to do so, the Company continues to look at ways to do this, which in the past has prompted the Company to move its shaft manufacturing operations offshore, first to Mexico, then China and more recently, Vietnam in 2006. The Company manufactures the majority of its golf shafts in China followed by Vietnam absorbing the second largest production volume.

Composite Materials

The Composite Materials segment is comprised of external sales of prepreg, film adhesives, fabrics and other materials and in 2007 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 did not benefit from contributions from CFT after that date. 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. Until the current year, 2008, the Company's external sales of prepreg and other materials had increased over the past several years. Sales of prepreg, as a percentage of net sales, were 14% for the period ended December 31, 2008 versus 15% for the comparable period in 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 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 backup film capacity 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 access.

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.

2008 Compared to 2007

Net Sales

                                       2008       2007        Chg      % Chg
              Composite Products     $ 46,023   $ 59,097   $ (13,074 )    (22 )%
              Composite Materials       7,583     10,049      (2,466 )    (25 )%

                 Total Net Sales     $ 53,606   $ 69,146   $ (15,540 )    (22 )%

Composite Products-

Composite Products net sales decreased by $13.1 million for 2008 as compared to 2007. The Company's average selling price of golf shafts decreased by 7% and overall units declined by 14% for 2008 as compared to 2007. The decrease in average selling prices was mainly attributed to mix of shafts sold. The decrease in units is mainly attributed to the overall state of the golf industry, which is suffering through the recession as are other industries. The golf industry was historically thought to be recession proof, with equipment sales that typically did not fluctuate by more than 1%-2% a year. Experts estimate that golf equipment sales were down 6%-8% in 2008. The Company's units were down approximately 5% year over year going into the fourth quarter and suffered a decrease in units of 35% for the fourth quarter 2008 as compared to the fourth quarter of 2007 as the recession worsened along with the continued collapse of the financial industry and housing market. The Company believes that it is positioned well with its customers when the economic conditions improve. The decrease in Composite Products sales were attributed to decreases in sales of branded and co-branded shafts, while OEM shaft sales remained relatively flat for 2008 as compared to 2007. Branded golf shaft sales declined by 37% and co-branded golf shaft sales declined by 58%. Branded and co-branded golf shaft sales decreased to 32% of Composite Products sales in 2008 from 44% in 2007. The decreases in branded shaft sales were attributed to a relatively weak demand of driver club units, which represent the best opportunities for branded shaft products. The Company has seen increased competition in this segment of the golf shaft market. Although, the Company's branded shaft sales have decreased year over year, the Company's branded shafts are still performing well on the professional golf tours. In addition to the decreases in shaft sales, sales of composite hockey sticks decreased by $1.7 million as the Company exited this business in 2007.

Composite Materials-

Composite Materials net sales decreased by $2.5 million for 2008 as compared to 2007 and represented approximately 14% of the Company's consolidated net revenues for 2008. The majority of our Composite Materials business is to customers 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 as economic factors improve for our customer base. The Company has added capacity in this segment over the past couple of years to support the Composite Products segment and for outside sales of Composite Materials. The Company continues to attempt to diversify its customer base in this segment so as not be highly concentrated in the recreational products industry.

Gross Profit

                                      2008       2007        Chg      % Chg
              Composite Products     $ 7,771   $ 15,528   $  (7,757 )    (50 )%
              Composite Materials      1,795      4,437      (2,642 )    (60 )%

                Total Gross Profit   $ 9,566   $ 19,965   $ (10,399 )    (52 )%

Composite Products-

Composite Products gross profit decreased by approximately $7.8 million, or 50% in 2008 as compared to 2007. The decrease in Composite Products gross profit was mainly attributed to the decrease in branded and co-branded golf shaft sales in 2008 as compared to 2007. Composite Products gross profit also suffered from increases in manufacturing costs attributed to lower manufacturing volumes of Composite Products and Composite Materials and increases in research and development

spending. Composite Products gross margin decreased to 17% for 2008 as compared to 26% for 2007. The Company believes that its gross margin will improve as it continues to build more shafts in Vietnam as compared to Mexico. The Company is continuing to transfer programs to Vietnam as they become qualified. The Company's gross profit was negatively affected by additional inventory reserves of $619,000 in 2008 as compared to $640,000 in 2007. The increase in reserves in 2008 and 2007 were offset by the sales of product that was fully reserved for of $128,000 in 2008 and $36,000 in 2007. The net effect of the inventory reserve adjustments was a decrease in gross profit of $491,000 in 2008 and a decrease in gross profit of $604,000 in 2007.

Composite Materials-

    The Composite Materials gross profit decreased by approximately
$2.7 million, or 60%, in 2008 as compared to 2007. The decrease was mainly
. . .