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, Escalade's ability to obtain financing and to maintain compliance with the terms of such financing 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.

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.

A majority of the Company's products are in markets that are experiencing low growth rates. Where the Company enjoys a commanding market position, such as table tennis tables in the Sporting Goods segment and paper folding machines in the Office Products segment, revenue growth is expected to be roughly equal to general growth/decline in the economy. However, in markets that are fragmented and where the Company is not the dominant leader, such as archery in the Sporting Goods segment and data security shredders in the Office Products segment, the Company anticipates growth. To enhance internal growth, the Company has a strategy of acquiring companies or product lines that complement or expand the Company's product lines. A key objective is the acquisition of product lines with barriers to entry that the Company can take to market through its established distribution channels or through new market channels. Significant synergies are achieved through assimilation of acquired product lines into the existing company structure. Management believes that key indicators in measuring the success of this strategy are revenue growth, earnings growth and the expansion of channels of distribution. The following table sets forth the percentage growth in revenues and net income over the past three years:

                                         2008      2007     2006


                     Net revenue
                     Sporting Goods     -24.5 %   -5.1 %    13.0 %
                     Office Products     -9.2 %    1.9 %   -12.2 %
                     Total              -19.9 %   -3.1 %     4.4 %

                     Net Income        -181.0 %    9.0 %   -34.2 %

Results of Operations

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

                                                       2008      2007      2006

       Net revenue                                    100.0 %   100.0 %   100.0 %
       Cost of products sold                           75.4 %    70.8 %    72.0 %

       Gross margin                                    24.6 %    29.2 %    28.0 %
       Selling, administrative and general expenses    26.8 %    20.8 %    20.6 %
       Impairment of assets                             1.8 %     0.0 %     0.0 %
       Amortization                                     1.5 %     1.4 %     1.2 %

       Operating income (loss)                         -5.5 %     7.0 %     6.2 %

Consolidated Revenue and Gross Margin

Continued sales declines to mass market retail customers in the Sporting Goods business resulted in an overall decline of 24% in consolidated net revenues for 2008 compared to 2007. These declines in the mass market retail channel offset gains in the specialty retail and dealer channels. Revenues from the Office Products business decreased 9% in 2008 compared to 2007 due principally to changes in foreign exchange rates.

Consolidated Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses ("SG&A") were $ 39.9 million in 2008 compared to $38.5 million in 2007, an increase of $1.4 or 3.6%. In 2008, sales were much less than plan during the second half of the year, thus the ratio of fixed SG&A cost on declining sales base coupled with the one-time cost of $1.5 million associated with severance pay and the closing of two manufacturing plants in 2008 resulted in SG&A expenses as a percent of sales to be significantly greater than the prior year (26.8% versus 20.8%). To offset the SG&A increase, the Company implemented many costs saving initiatives including the reduction of staff by 20%, the voluntary reduction of officer and director salaries by 10% and other cost saving initiatives whose full result will not be felt until 2009. Additionally the reduction in SG&A costs in the Sporting Goods business is associated with the lack of a profit improvement bonus accrual based on the Company's lack of profitability. SG&A cost in the Office Products division remained relatively stable with a reduction in profit improvement bonus accrual offset by an increase in currency exchange in Europe. The increase in corporate administration costs is primarily attributed to computer software support for a new ERP system, employee relocation costs and stock options, offset by lower staff and salaries cited above.

Other Income

Other income decreased in 2008 compared to 2007 as a result of losses on the sale and impairment of securities totaling ($1.4) million in 2008 compared with a $1.5 million gain from the one-time sale of rights to license potential future intellectual property in 2007.

Provision for Income Taxes

The effective income tax rate in 2008 was higher relative to 2007 primarily due to taxation on repatriated earnings from the Company's foreign operations. Excluding the effects of this repatriation, the effective tax rate for 2008 would have been 29.6% compared to 29.6% and 25.9% in 2007 and 2006, respectively. The Company expects future effective tax rates to approximate the effective tax rate achieved in 2008 excluding the effect of repatriated earnings.

Sporting Goods

Net sales, operating income (loss), and net income (loss) for the Sporting Goods
business segment for the three years ended December 27, 2008 were as follows:


               In Thousands                2008       2007        2006


               Net Revenue               $ 98,039   $ 129,788   $ 136,733
               Operating income (loss)     (6,250 )     7,745       7,835
               Net income (loss)           (5,428 )     5,341       3,562

Net revenue declined 24% in 2008 compared to 2007. Sales to the Company's mass market retail customers declined roughly 33% in 2008 compared to 2007 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 game tables.

Sales in 2007 were lower than 2006 due primarily to a reduction in sales to the mass market.

The gross margin ratio in 2008 decreased compared to 2007 due to continued pricing pressures from mass market retailers, higher material prices, factory absorption variances and product mix. As a result, operating income (loss) as a percentage of net revenue decreased to -6.4% in 2008 compared to 5.9% in 2007. Management anticipates operating income to increase in 2009 as 2008 personnel reductions and facility consolidations are realized.

Net income for 2008 decreased from 2007 due primarily to the one-time sale of rights to license potential future intellectual property, variances incurred in operations with the sales level decline, higher material prices and change in product mix.

Office Products

Net sales, operating income, and net income for the Office Products business
segment for the three years ended December 27, 2008 were as follows:


                   In Thousands         2008       2007       2006


                   Net Sales          $ 50,647   $ 55,788   $ 54,732
                   Operating income      3,930      8,809      8,131
                   Net income            1,835      5,617      5,095

Sales in the Office Products business decreased 9.2% in 2008 compared to 2007 primarily due to lower sales to office supply mass-retailers in the U.S. which are being negatively impacted by the worsening economy and a slowdown in European sales due to slowing economy in Germany, France and Spain. Management anticipates further declines in sales to office product retailers as the global economy continues to decline. However, new product launches and an expanding presence in machine dealers is expected to lessen the impact of these declines.

Excluding the effect of changing foreign exchange rates, 2007 sales were essentially unchanged from 2006.

Profitability in the Office Products segment decreased in 2008 as evidenced by the ratio of operating income to net sales which decreased from 15.8% in 2007, to 7.8% in 2008. The primary reasons for this decline in profitability are raw material price and freight increases, foreign exchange rate fluctuations, under absorbed factory variances due to low sales and changes in product mix. Management anticipates operating income to increase in 2009 due to price increases, new product launches, realization of 2008 personnel reductions and a focus on the machine dealer channel which carries a higher gross margin.

Financial Condition and Liquidity

The current ratio, a basic measure of liquidity (current assets divided by current liabilities), decreased to 1.1 times in 2008 from 1.8 times in 2007. Total accounts receivable and inventories are down at the end of 2008 as a direct result of a lower sales volume.

The Company's use of cash was principally caused by the loss of business from mass retailers relative to the deteriorating economic conditions coupled with the rising cost of raw materials, freight and fixed costs associated with excess capacity. During the year, the Company authorized and paid a $3.2 million dividend and invested $6.6 million dollar capital expenditure to invest in its IT system for the future. Other significant uses of cash included $2.9 million in plant equipment, $0.5 million in acquisitions, repurchase of stock of $0.9 million, net proceeds received from the sale of investments of $1.5 million and proceeds from the exercise of stock options of $0.3 million and other miscellaneous items net. The result of the convergence of all these factors was a need by year-end to utilize $14.4 million in additional borrowings which moved total bank debt as a percent of stockholders equity from 35% in 2007 to 59% in 2008.

The Company's working capital requirements are primarily funded through cash flows from operations and revolving credit agreements with its bank. During 2008 the Company's maximum borrowings under its primary revolving credit lines totaled $54.8 compared to $52.4 million in 2007. The overall effective interest rate in 2008 was 4.1% which was lower than the effective rate of 6.7% in 2007. As discussed in Part I, Item 1A - Risk Factors, the Company was out of compliance with certain financial covenants in its Credit Agreement with JPMorgan Chase Bank, N.A. as of the end of 2008.

The Company has a long standing relationship with its lender and has diligently worked to extend its credit facility into 2010 and to establish financial covenants that can be met. The Company has taken significant actions to preserve cash, increase liquidity and position it to operate in very difficult economic conditions. Specifically, the Company has consolidated three manufacturing plants into one thus eliminating the burdens of excess capacity that negatively affected 2008. It has increased prices, reduced head counts, reduced officer and director salaries, and implemented other overall expense savings. As a result, the Company expects to be positioned to lower its bank debt in 2009. The Company operates in an industry which has been adversely affected by the current economic conditions. The Company is currently operating under a forbearance letter with its primary lender; however as, disclosed previously, a commitment letter has been received from this lender to provide the Company with sufficient borrowing needs through May 17, 2010.

As a result of the external economic conditions, the Company experienced significant losses in the latter half of fiscal year 2008 and has been out of compliance with its loan covenants since the end of the second quarter, 2008. In response to the challenging economic environment, management began implementing a series of cost reduction measures during the third and fourth quarters of fiscal year 2008.

The Company expects its sales levels for fiscal year 2009 to be substantially lower than 2008. To help mitigate the declining sales expected to occur during fiscal year 2009, management will continue to implement several cost reduction measures. The Company believes that cash generated from its projected 2009 operations, the potential sale of its Reynosa facility, income tax refunds and the commitment of borrowings from its primary lender will provide it with sufficient cash flows for its operations.

It is possible that if the current economic conditions continue to deteriorate, this could have further adverse effects on the Company's ability to operate profitably during fiscal year 2009. To the extent that occurs, management intends to continue to make cost reductions and to continue realigning its infrastructure in an effort to match the Company's overhead and cost structure with the sales level dictated by current market conditions. Although not currently planned, realization of assets in other than the ordinary course of business in order to meet liquidity needs could incur losses not reflected in these financial statements.

New Accounting Pronouncements

Refer to Note 1 to the consolidated financial statements under the sub-heading "New Accounting Pronouncements" beginning on page 43.

Off Balance Sheet Financing Arrangements

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

The following schedule summarizes the Company's contractual obligations as of December 27, 2008:

Amounts in thousands Payments Due by Period

Contractual Less than 1 More than 5 Obligations Total year 1 -3 years 3 - 5 years years

Debt                      $   46,525    $      46,525    $          -    $           -    $           -
Future interest
payments (1)                   1,954            1,954               -                -                -
Operating Leases               2,732            1,204           1,490               38                -
Minimum payments under
royalty and license
agreements                     2,200              580             780              840               --

Total                     $   53,411    $      50,263    $      2,270    $         878    $           -

Notes:

(1) Assumes that the Company will not increase borrowings under its long-term credit agreements and that the effective interest rate experienced in 2008 (4.1 %) will continue for the life of the agreements.

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.

Inventory Valuation Reserves
The Company evaluates inventory for obsolescence and excess quantities based on demand forecasts based on specified time frames, usually one year. The demand forecast is based on historical usage, sales forecasts and current as well as anticipated market conditions. All amounts in excess of the demand forecast are deemed to be potentially excess or obsolete and a reserve is established based on the anticipated net realizable value. To the extent that demand forecasts are greater than actual demand and the Company fails to reduce manufacturing output accordingly, the Company could be required to record additional inventory reserves which would have a negative impact on 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.

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.

Impairment of Goodwill
The Company annually tests for impairment of goodwill in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets". The Company engaged a valuation expert to assist them with their evaluation of the fair value of three separate reporting units, discussed below. The fair values were compared to their carrying value as of the year end. The first phase, of the goodwill impairment test requires that the fair value of the applicable reporting unit be compared with its recorded value. The Company establishes fair value by using a combination of a market approach and discounted cash flow approach. The discounted cash flow was determined by calculating the present value of the expected future cash flows of the reporting unit. The Company uses assumptions about expected future operating performance in determining estimates of those cash flows, which may differ from actual cash flows. If the recorded value of net assets of a reporting unit is less than the fair value calculated by the discounted cash flow analysis, management performs a phase two analysis which allocates the fair value of the reporting unit calculated in phase one to the specific tangible and intangible assets and liabilities of the reporting unit, which results in an implied fair value of goodwill. Goodwill is reduced by any shortfall of implied goodwill to its current carrying value.

The Company has three reporting units that require separate goodwill impairment analysis. Those reporting units are Escalade Sports (domestic sporting goods manufacturing), Martin Yale North America (domestic office products manufacturing) and Martin Yale Europe (international office products manufacturing). Significant assumptions used in each of the reporting units goodwill impairment testing are as follows:

Martin Yale North America - The discount rate used in the 2008 discounted cash flow calculation was 10% compared to 6% for 2007. The higher discount rate was used based on advice from the outside valuation expert hired by the Company to assist in the valuation effort. Projected revenues for 2009 and beyond reflected the Company's best view of the current global economic situation, the status of new products and product improvements, and the projected cost of raw materials along with any other factors deemed material in projecting future outcomes. The Company used a combination of discounted cash flow and market approach giving equal weight to both methods in determining the fair value of the Martin Yale North America reporting unit.

Martin Yale North America - The discount rate used in the 2008 discounted cash . . .