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, Escalade's ability to successfully integrate the operations of acquired assets and businesses, 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.

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, 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.

Results of Operations

The Company's operating income for the second quarter and first half of fiscal 2009 was $1,374 thousand and $746 thousand, respectively, compared to operating losses of $(789) thousand and $(1,845) thousand for the same periods last year. Net revenues for the second quarter and first half of fiscal 2009 declined 22.2% and 19.2%, respectively, compared to same periods last year; however, the Company has achieved improved gross margins and lower selling, administrative and general expenses mainly due to facility consolidation in the Sporting Goods segment and Company-wide cost cutting measures implemented last year which have dramatically improved Company profits.

                                    Three Months Ended                         Six Months Ended

                            July 11, 2009        July 12, 2008        July 11, 2009        July 12, 2008

Net revenue                          100.0 %              100.0 %              100.0 %              100.0 %
Cost of products sold                 69.0 %               72.7 %               68.8 %               72.1 %

Gross margin                          31.0 %               27.3 %               31.2 %               27.9 %
Selling, administrative
and general expenses                  24.5 %               27.4 %               27.7 %               28.8 %
Amortization                           2.6 %                1.6 %                2.3 %                1.6 %

Operating income (loss)                3.9 %               (1.7 )%               1.2 %               (2.5 )%

Consolidated Revenue and Gross Margin

Sales in the Sporting Goods business declined 19.8% and 16.6% in the second quarter and first half of fiscal 2009 respectively, compared to the same periods last year. Based on the first half year results and product placement information, the Company expects Sporting Goods sales to be approximately 20% lower in 2009 compared to 2008. The Company is continuing to identify and implement cost saving initiatives and to enhance product design to expand market share to improve Company profits.

Compared to last year, Office Products sales declined 26.3% and 23.4% for the second quarter and first half of fiscal 2009, respectively. Sales declined 21.8% in the United States and 24.8% in Europe for the first half of 2009. The Company expects sales declines for the remainder of 2009 to be relatively unchanged from the decline experienced in the first half of fiscal 2009.

The overall gross margin ratios for the second quarter and first half of fiscal 2009 were 3.7% and 3.3% higher, respectively, over the same periods last year due to cost reductions and facility consolidations initiated in 2008 resulting in positive production cost variances.

Consolidated Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses ("SG&A") for the second quarter and first half of fiscal 2009 were down 30.4% and 22.4%, respectively, compared to the same periods last year. Excluding the effect of changes in foreign currency rates, SG&A costs for the first half of fiscal 2009 were down 19.0% due mainly to decreases in variable compensation in relation to decreases in sales volume and the continued benefit of personnel reductions and facility consolidation initiated in 2008.

Provision for Income Taxes

The effective tax rate for the first half of 2009 for domestic operations was 37% compared with 38% for the same period last year. As a result of net losses in certain foreign countries where a tax benefit is not expected to be realized, the Company is reporting a provision for income tax as of the end of the second quarter of $150 thousand on pre-tax income of $77 thousand.

Financial Condition and Liquidity

The following schedule summarizes the Company's total debt:


In thousands                July 11, 2009     July 12, 2008     December 27, 2008


Notes payable short-term   $        40,052   $        52,345   $            46,525
Long-term debt                           -             2,737                     -

Total debt                 $        40,052   $        55,082   $            46,525

As a percentage of stockholders' equity, total bank debt was 50%, 63% and 59% at July 11, 2009, July 12, 2008 and December 27, 2008, respectively.

During the first half of 2009, operations provided $7.9 million in cash primarily due to reductions in accounts receivable and inventory and income tax refunds.

The Company's working capital requirements are 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 the same level of revolving credit that was available in 2008.

During the first half of fiscal 2009, the Company finalized its new credit agreement with JP Morgan Chase. As part of that agreement, the Company consented to merge one of its subsidiaries, Indian Martin, Inc. into the parent company, Escalade, Inc. The merger was completed during the second quarter of 2009. The Company is continuing to market the Reynosa facility through a national broker and is pursuing all viable offers of purchase or lease. The Company has completed the Mexico facility consolidation and is fully operational at the Rosarito site. There have been no material changes to previously identified cost reduction measures.