ITEM 1A.          RISK FACTORS

You should carefully consider the risks described below and the other information in this report before deciding to invest in shares of our common stock. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline and you could lose all or part of your investment.

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financial reporting, our business, results of operations and financial condition, and investors’ confidence in us, could be materially and adversely affected.

As a public company, we are required to comply with the periodic reporting obligations of the Exchange Act, including preparing annual reports, quarterly reports and current reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits, and restrict our ability to access financing. In addition, we will be required under applicable law and regulations to integrate our systems of internal controls over financial reporting. We plan to evaluate our existing internal controls with respect to the standards adopted by the Public Company Accounting Oversight Board. During the course of our evaluation, we may identify areas requiring improvement with respect to our internal control over financial reporting, and we may be required to design enhanced processes and controls to address issues identified through this review.identified. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities.  If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controlscontrol over financial reporting in accordance with the Sarbanes-Oxley Act.  Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud.

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Provisions of our corporate charter documents, Delaware law, and our stockholder rights plan may dissuade potential acquirers, prevent the replacement or removal of our current management and may thereby affect the price of our common stock.

The board of directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges, and restrictions, including voting rights of those shares without any further vote or action by the stockholders.  The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.  The issuance of preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.  We have no present plans to issue shares of preferred stock.  Further, certain provisions of our certificate of incorporation, and bylaws, and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving us.

We also have a stockholder rights plan which is designed to protect and maximizeenhance the value of our outstanding equity interests in the event of an unsolicited attempt to acquire us in a manner or on terms not approved by the board of directors and that would prevent stockholders from realizing the full value of their shares of our common stock. Its purposes are to deter those takeover attempts that the board believes are undesirable, to give the board more time to evaluate takeover proposals and consider alternatives, and to increase the board’s negotiating position to maximizeenhance value in the event of a takeover. The rights issued pursuant to the plan are not intended to prevent all takeovers of us.our company.  However, the rights may have the effect of rendering more difficult or discouraging our acquisition. The rights may cause substantial dilution to a person or group that attempts to acquire us on terms or in a manner not approved by the board of directors, except pursuant to an offer conditioned upon the negation, purchase, or redemption of the rights with respect to which the condition is satisfied.

Additional provisions of our certificate of incorporation and by-lawsbylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common

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Dividends

The Company did not pay any dividends in 2005,2008, although prior to becoming a public company in December 1993, the Company had from time to time paid cash dividends on its capital stock. The Company presently intends to retain all of its earnings to provide funds for the operation of its business, although it would consider paying cash dividends in the future.  The Company’s ability to pay dividends is subject to approval by its principal lending institution.

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Examples of these risks, uncertainties and other factors include, without limitation, the following: (i) economic conditions that affect sales of the products of the Company’s packaging customers,customers; (ii) actions by the Company’s competitors and the ability of the Company to respond to such actions,actions; (iii) the ability of the Company to obtain new customerscustomers; and (iv) the ability of the Company to execute and integrate favorable acquisitions.  In addition to the foregoing, the Company’s actual future results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth elsewhere in this report and changes in general economic conditions, interest rates and the assumptions used in making such forward-looking statements.  The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Investment in and Advances to Affiliated Partnership

The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”).  As a result of adoptingIn compliance with the provisions of FIN 46(R),46R, the Company has consolidated the financial statements of UDT as of December 31, 2003,for all periods presented, because –— when including related party ownership –— the Company effectively owns greater than 50% of UDT. Prior to December 31, 2003, this investment was accounted for under the equity

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method at cost, plus the Company’s proportionate share of the limited partnership’s income, less any distributions received from the limited partnership.

Results of Operations

The following table sets forth, for the years indicated, the percentage of revenues represented by the items as shown in the Company’s consolidated statements of operations:

Overview

UFP Technologies is a leadingan innovative designer and manufacturercustom converter of interior protective packaging solutions using molded fiber, vacuumformedfoams, plastics, and molded and fabricated foam plasticfiber products. The Company also designs and manufactures engineered component solutions using laminating, molding and fabricating technologies.  The Company serves a myriad of markets, but specifically targets opportunities in the automotive, computers and electronics, medical, aerospace and defense, industrial, and consumer markets.

During 2005On January 18, 2008, the Company absorbed costs associated with the launchacquired Stephenson & Lawyer, Inc. (“S&L”), a Grand Rapids, Michigan-based foam fabricator.  Operating out of several new programs in its automotive operations in Michigan as well as in its large, estimated $95 million programa 255,000-square-foot manufacturing plant, S&L specializes in the Southeast that caused significant losses in its automotive business unit. These costs were in the formfabrication of higher than anticipated scrap rates and additional direct labor requirements that, combined, caused significant losses in this business unit. However, robust demand in the remaining markets that the Company serves generated sufficient profitstechnical urethane foams.  In addition to more than absorb these losses. Particularly strong demand for product was in the military and medical markets. The high scrap rates and excessive direct labor improved dramatically by year-end and the Company expects better results in the automotive business unit in 2006.

During 2005, the Company was faced with significant raw material price increases and, in some cases, shortages duesignificantly adding to high oil and natural gas prices, Asian demand for the same raw materials and the impact of Hurricanes Katrina and Rita on petrochemical plants along the Gulf coast. The majority of raw materials used by the Company—polyurethane and polyethylene foams—utilize petroleum based resins in their production. In most cases, the Company has been able to pass the cost increases through to its customers. Although prices appear to have stabilized, pricing discussions with the Company’s customers are ongoing.real estate, S&L brings access to this family of foams, modern manufacturing capabilities, and a seasoned management team to the Company.  The acquisition is an example of the

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Company’s dual strategy of growing its top line organically through a focused marketing plan as well as through strategic acquisitions.

The Company reported record earnings for its fiscal year ended December 31, 2008, largely due to increased sales and stronger gross margins.  However, it experienced a softening of sales in the fourth quarter of 2008.  Sales to the automotive industry have weakened significantly as holiday shutdowns started earlier than normal and extended well into January 2009, largely attributable to very soft automotive sales in North America.  Given the current condition of the automobile industry as well as the overall weak economy, the Company expects continued soft sales at least through the first quarter of 2009.

20052008 Compared to 20042007

The Company’s netNet sales increased 22.4%17.6% to $84.0$110.0 million in the year ended December 31, 2008, from $93.6 million in the same period of 2007.  Without its newly acquired plant in Grand Rapids, Michigan (Component Products segment), sales increased 4% for the year ended December 31, 2008.  Sales in the Component Products segment increased 13.1% to $60.8 million for the year ended December 31, 2005,2008, from $68.6$53.8 million in 2004. Component Productthe same period of 2007.  The increase is primarily due to sales of $12.7 million from the newly acquired plant in Grand Rapids, partially offset by a decrease in sales to the automotive industry of approximately $5.9 million.  The Company believes that sales to the automotive industry will continue to weaken in 2009.  Sales in the Engineered Packaging segment increased 33.4%23.5% to $48.2$49.2 million for the year ended December 31, 2008, from $39.8 million in 2005 from $36.1 million in 2004.the same period of 2007.  The increase in sales is primarilylargely due to an increase in sales from recently launched automotive programsof $3.9 million to a key electronics customer, as well as strong demand from customers in the medical and military markets. Packaging sales increased 10% to $35.7 million in 2005 from $32.5 million in 2004. The increase in sales is primarily due to growth in sales at the Company’s plant in El Paso, Texas, and stronger demand for case insert product. The Company continued to invest in the area of marketing and sales in 2005 and attributes a portion of the Company’s sales growth in 2005 to these investments.environmentally friendly molded fiber packaging.

Gross profit as a percentage of sales (“Gross Margin”) decreasedincreased to 17.4%26.0% in 20052008 from 20.4%24.4% in 2004.2007.  The declineimprovement in gross margin is primarily attributable to the impactCompany-wide continued strategic pricing and manufacturing efficiency initiatives (material and labor as a percentage of high material scrap ratessales are down 1.2% and direct labor associated with new automotive contracts0.8%, respectively) partially offset by improvements fromlower gross margins in the fixed portion of labor and overhead measured against higher sales in both the Component Product and Packaging segments.Company’s automotive plants (Component Products segment).

Selling, General and Administrative Expenses (“SG&A”) increased 2.7%20.9% to $12.4$18.8 million for the year ended December 31, 20052008, from $12.1$15.6 million in 2004.2007.  As a percentage of sales, SG&A was 14.8%17.1% and 17.6%16.7% in the years ended December 31, 20052008, and 2004,2007, respectively.  The increase in SG&A dollarsspending is primarily attributable to continued investments madeincreased SG&A from the newly acquired plant in the areasGrand Rapids of marketing and salesapproximately $2.2 million (Component ProductProducts segment) as well as increased equity-based compensation of approximately $600,000 (Component Products and Packaging segments), increased corporate governance.

The Company recorded a restructuring charge of approximately $1.3 million during the year ended December 31, 2008, associated with the consolidation of its Macomb Township, Michigan, automotive operations into its newly acquired plant in Grand Rapids, Michigan.  The $1.3 million charge is for the costs associated with vacating the Macomb Township premises, severance, relocation and compliancestay-bonuses for its employees, equipment moving and hook-up costs, (Component Product and Packaging segments)training and incremental SG&A withinother start-up costs.  As of December 31, 2008, the automotive business unit (Component Product segment).move was completed and all significant costs had been incurred.

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Interest expense increaseddecreased to $1,041,000approximately $334,000 for the year ended December 31, 2005,2008, from approximately $714,000$479,000 in 2004.2007.  The increasedecrease in interest expense is primarily attributable to higherlower average interest rates as well as higher average debt balances in the Company’s revolving credit facility due to sales growth.borrowings.

The Company recorded income tax expense as a percentage of 24%pre-tax income of 36.9% and 35.9%38.3% for the years ended December 31, 20052008, and 2004,2007, respectively. The low effective tax rate for 2005 reflects research and development tax credits taken on the Company’s tax returns.  The Company has deferred tax assets on its books associated with net operating losses generated in previous years.  The Company has considered both positive and negative available evidence in its determination that the deferred tax assets will be realized, and has not recorded a tax valuation allowance at December 31, 2005.2008.  The Company will continue to assess the realizability of deferred tax assets created by recording tax benefits on operating losses and, where appropriate, record a valuation allowance against these assets.  The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term, if estimates of future taxable income during the carryforward period are reduced.

20042007 Compared to 20032006

The Company’s net sales increased 12.7%decreased slightly to $68.6$93.6 million for the year ended December 31, 2004,2007, from $60.9$93.7 million in 2003.2006.  While 2007 sales were virtually the same as sales in 2006, there was a shift in product mix.  Sales in the Component Product sales increased 15.5% to $36.1 million in 2004 from $31.3 million in 2003. The increase in sales is primarilyProducts segment decreased approximately 4.2%, largely due to strong demand from customersshrinking sales to the automotive market.  The Company attributes the reduction in automotive sales to the medical and military marketsend of certain programs in its Michigan plant, as well as prototype salesthe maturing of its large southeast automotive program.  Sales to the automotive industry declined by approximately $1.9 million.  The decline was largely offset by an approximately 4.8% increase in the automotive

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industry associated with the Company’s large program that launched late in the fourth quarter of 2004.Engineered Packaging sales increased 9.6%segment sales.  The Company attributes this increase primarily to $32.5approximately $1.3 million in 2004 from $29.6 million in 2003. The increase inincreased sales is primarily due to growth in sales at the Company’s new plant in El Paso, Texas, and stronger demand forof case insert product. The Company has invested in the area of marketing and sales in recent years and attributes a portion of the Company’s sales growth in 2004products to these investments.key accounts.

Gross profit as a percentage of sales (“Gross Margin”) increased to 20.4%24.4% in 20042007 from 17.6%20.5% in 2003.2006.  The improvement in gross margin is primarily attributable to the fixed portion of labor and overhead measured against higher salesmanufacturing efficiency initiatives, particularly in both the Component Product and Packaging segments. In addition, the Company’s molded fiber division (Packagingautomotive operations (Component Products segment) operated at higher.  The Company estimates that these initiatives in the automotive operations improved gross margins due to a more efficient operating structure resulting from the plant consolidations in recent years.by approximately 2.0%.

Selling, General and Administrative Expenses (“SG&A”) increased 11.8%9.7% to $12.1$15.6 million for the year ended December 31, 20042007, from $10.8$14.2 million in 2003.2006.  As a percentage of sales, SG&A was 17.6%16.7% and 17.8%15.1% in the years ended December 31, 20042007, and 2003,2006, respectively.  The increase in SG&A dollarsspending is primarily attributable to investments made inincreased sales resources of approximately $700,000 (across both business segments) as well as equity-based compensation resulting from the areasimplementation of marketing and salesSFAS No. 123R (Component ProductProducts and Packaging segments), increased corporate governance and compliance costs (Component Product and Packaging segments) and incremental SG&A associated with the Company’s new automotive program (Component Product segment). of approximately $250,000.

Interest expense decreased to approximately $714,000$479,000 for the year ended December 31, 2004,2007, from approximately $784,000$964,000 in 2003.2006.  The declinedecrease in interest expense is primarily attributable to lower average borrowings partially offset by the impact of higher interest rates primarily due to better Company performance.rates.

The Company recorded income tax expense as a percentage of 36%pre-tax income of 38.3% and 37.3% for the yearyears ended December 31, 2004. It recorded2007, and 2006, respectively.  The higher effective tax rate for 2007 reflects a netreduction in the amount of eligible research and development tax benefit of 36% of its pre-tax loss in 2003. The tax benefit recorded in 2003 reflects primarilycredits expected to be taken on the expected utilization of a net operating loss generated during the year in future federalCompany’s 2007 tax returns.  The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The Company has considered both

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positive and negative available evidence in its determination that the deferred tax assetassets will be realized, and has not recorded a tax valuation allowance at December 31, 2004.2007.  The Company expects to utilize a significant amount of its federal net operating losses when it prepares its 2007 tax returns.  The Company will continue to assess the realizability of deferred tax assets created by recording tax benefits on operating losses and, where appropriate, record a valuation allowance against these assets.  The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term, if estimates of future taxable income during the carryforward period are reduced.

Goodwill

Amortization of Goodwill and certain indefinite lived intangible assets ceased with the adoption of SFAS No. 142, effective January 1, 2002.

Restructuring

On October 22, 2003, the Company’s Board of Directors approved a formal plan of restructure in response to continued losses in the Company’s molded fiber plant in Visalia, California. Accordingly, the Company recorded restructuring charges of $1,405,000 consisting of asset impairments of $640,000, severance of $40,000, and future lease commitments of $725,000, in the fourth quarter of 2003. No balance remains on the balance sheet as of December 31, 2005.

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Liquidity and Capital Resources

The Company funds its operating expenses, capital requirements, and growth plan through internally generated cash, bank credit facilities, and long-term capital leases.

As of December 31, 20052008, and 2004,2007, working capital was $3,321,000approximately $18,688,000 and $1,431,000,$14,952,000, respectively.  The increase in working capital is primarily attributable to higher accounts receivablean increase in receivables and inventory of approximately $3.5$959,000 and $2.3 million, respectively, due largely to the acquisition of Stephenson & Lawyer, Inc. in January 2008 and a decrease in accounts payable of approximately $2.4 million due to strong fourth quarter sales and higher inventory balancesthe timing of approximately $1.2 million,year-end check runs, partially offset by higher accounts payable balancesa decrease in cash of approximately $2.4 million.$2.3 million due to the Company’s acquisition of Stephenson & Lawyer. Cash provided from operations was $1,008,000approximately $7.3 million and $1,434,000 for 2005$10.1 million in 2008 and 2004,2007, respectively.  The primary reason for the decrease in cash generated from operations in 20052008 is higher receivables duea decrease in accounts payable of approximately $2.1 million during the fiscal year ended December 31, 2008, compared to an increase in accounts payable of approximately $500,000 during fiscal 2007.  This change was caused by the Company’s large sales growth.difference in the timing of check runs at the end of each respective year.  Net cash used in investing activities in 20052008 was approximately $1.1$7.8 million and was used primarily for the acquisition of Stephenson & Lawyer, Inc. of approximately $5.2 million and the acquisition of new manufacturing equipment.equipment of approximately $2.8 million.

On February 28, 2003, the Company obtained a new credit facility, which has beenwas amended effective March 24, 2004, June 28, 2004, and November 21, 2005, to reflect, among other things, changes to certain financial covenants.  The amended facility iswas comprised of:  (i) a revolving credit facility of $17 million that is collateralized by the Company’s accounts receivable and inventory;million; (ii) a term loan of $3.7 million with a 7-yearseven-year straight-line amortization that is collateralized by the Company’s property, plant and equipment (excluding UDT’s property, plant and equipment);amortization; and (iii) a term loan of $2.3 million with a 15-year straight-line amortizationamortization.  The amended credit facility called for interest of Prime or LIBOR plus a margin that isranges from 1.0% to 1.5%, depending upon Company performance.  The loans were collateralized by a mortgagefirst priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts.  All borrowings at December 31, 2008, had interest computed at Prime or LIBOR plus 1.0%.  Under the amended credit facility, the Company was subject to certain financial covenants, including maximum capital expenditures and minimum fixed-charge coverage.  As of December 31, 2008, the Company was in compliance with all of these covenants.  At December 31, 2008, the interest rate on these facilities ranged from 1.5% to 3.25%.

On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA.  The facility is comprised of: (i) a revolving credit facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20-year straight-line amortization; and (iv) a term loan of $4.0 million with a 20-year straight-line amortization.  Extensions of credit under the revolving credit facility are subject to available collateral based in part upon accounts receivable and inventory levels.  Therefore, the entire $17 million may not be available to the

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Company.  For example, as of December 31, 2005, based upon revolving credit facility borrowings outstanding of $8.0 million and collateral levels, the Company had availability of $6.5 million of additional credit under this facility. The amount of availability can fluctuate significantly. The amended credit facility calls for interest of Prime or LIBOR plus a margin that ranges from 1%1.0% to 1.5%, depending or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero.  In both cases the applicable margin is dependent upon Company performance.  All borrowings at December 31, 2005 had interest computed at Prime or LIBOR plus 1.25%.The loans are collateralized by a first priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan.  Under the amended credit facility, the Company is subject to certaina minimum fixed-charge coverage financial covenants including maximum capital expenditures and minimum fixed charge coverage. As of December 31, 2005, the Company was in compliance with all of these covenants.covenant.  The Company’s new $17 million revolving credit facility as amended, is due February 28, 2009;November 30, 2013; the $3.7 million term loan and the $2.3 million mortgageloans are all due November 21, 2011. At December 31, 2005, the interest rate on these facilities ranged from 5.5% to 7.25%.January 29, 2016.

As a result of the consolidation of United Development Company Limited,UDT, a mortgage note collateralized by the Alabama and Florida facilities, dated September 4, 2002, originally for $470,313, iswas included within long-term debt in the December 31, 2006 consolidated financial statements.  On May 22, 2007, this note was refinanced.  The remaining principal balance of $388,356 on the old note was paid in full.  The new note is secured by the Florida facility and has a principal balance of $786,000.  The note calls for fifty principal180 monthly payments of $3,406 and one payment of $300,013 due on December 4, 2006.$7,147.  The note bears interest at LIBOR plus 2.75%, adjusted monthly. At December 31, 2005, the outstanding balance was $404,459. At December 31, 2005, the interest rate wasis fixed at approximately 7.1%7.2%.  PaymentsThe additional funds of approximately $400,000 were used to fund building improvements in the Florida facility.    The outstanding balance on this note are funded through rent payments that the Company makes on its Alabama and Florida facilities. The Companyat December 31, 2008, is not subject to any financial covenants under this mortgage note.$737,289.

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In addition to the above credit facilities, the Company hashad capital lease debt of $3.0 million$1,612,665 as of December 31, 2005.2008.  These loansleases are secured by specific manufacturing equipment used by the Company and have remaining lives ranging from one to six years and bear interest at rates ranging from 6%7% to 10%8%.  Subsequent to December 31, 2008, the Company paid off these obligations in full.

The Company has no significant capital commitments in 2006,2009, but plans on adding capacity to enhance operating efficiencies in its manufacturing plants.  The Company may consider the acquisition of companies, technologies, or products in 2006, which2009 that are complementary to its business.  The Company believes that its existing resources, including its revolving loancredit facility, together with cash generated from operations and funds expected to be available to it through any necessary equipment financing and additional bank borrowings, will be sufficient to fund its cash flow requirements through at least the end of 2006.2009.  However, there can be no assurances that such financing will be available at favorable terms, if at all.

Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

The following table summarizes the Company’s contractual obligations at December 31, 2005,2008, as adjusted for January 2009 refinancing activity, as well as the January 2009 payoff of the capital lease obligations, and the effect such obligations are expected to have on its cash flow in future periods:

Payments on the United Development Company Limited note are funded through rent payments made by the Company on the Company’s Alabama and Florida facilities.

The Company requires cash to pay its operating expenses, purchase capital equipment and to service the obligations listed above.  The Company’s principal sources of funds are its operations and its

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revolving credit facility.  Although the Company generated cash from operations in the year ended December 31, 2005,2008, it cannot guarantee that its operations will generate cash in future periods.

The Company does not believe that inflation has had a material impact on its results of operations in the last three years.

Critical Accounting Policies

The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring andcharges, contingencies, and litigation.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including current and

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anticipated worldwide economic conditions, both in general and specifically in relation to the packaging industry, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K.  The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

The Company has reviewed these policies with its Audit Committee.

Revenue Recognition

The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is reasonably assured of collecting.collection.  If a loss is anticipated on any contract, a provision for the entire loss is made immediately.  Determination of these criteria, in some cases, requires management’s judgments. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue for any reporting period could be adversely affected.

Long-Lived Assets and Intangible Assets

The Company reviews long-livedIntangible assets include patents and allother intangible assets.  Intangible assets with an indefinite life are not amortized. Intangible assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from eight to 14 years. Indefinite-lived intangible assets are tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Intangible assets with a definite life are tested for impairment whenever events or changes in circumstances indicate the carrying amount of such assetsthat their value may not be recoverable. Goodwill is reviewed at least annually for impairment. Beginning in 2005, the Company changed its annual goodwill impairment testing date from the second quarter to the fourth quarter of its fiscal year.  The Company believes this new accounting method is preferable, since more complete and accurate information to assess goodwill for impairment is available in the fourth quarter, including actual financial performance to date and information relative to the carrying value of assets.  There is no financial impact as of the year ended December 31, 2005, or on any prior periods, as a result of this change in accounting method.  Recoverability of long-lived assets and definite lived intangible assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then long-lived assets are written down to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. Recoverability of goodwill is determined under a two-step process as described in SFAS 142. The fair value of reporting units determined under step one is also based on a discounted cash flow model. At December 31, 2005, no impairment has been identified. Forecasted cash flows are based upon numerous assumptions used by management, such as revenue growth, margins and asset management. For purposes of this analysis, the Company reviews its internal forecasts and external data. The external data consist of data available from customer and competitor commentary, and industry forecasts of future revenue growth.

The estimates of expected cash flows require the Company to make significant judgments regarding future periods that are subject to some factors outside of the Company’s control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.reduced.

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Goodwill

Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics.  At December 31, 2008 the Company redefined its reporting units to include its Component Products segment, Packaging segment (excluding its Molded Fiber operation), and its Molded Fiber operation as separate reporting units for goodwill impairment testing.  An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company completed its annual goodwill impairment test as of December 31, 2008, and determined that no goodwill was impaired.

Accounts Receivable

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  These allowances for doubtful accounts are determined by reviewing specific accounts that the Company has deemed are at risk of being uncollectible and other credit risks associated with groups of customers.  If the financial condition of the Company’s customers were to deteriorate or economic conditions were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required with a resulting charge to results of operations.

Inventory

The Company provides reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  The Company fully reserves for inventories deemed obsolete.  The Company performs periodic reviews of all inventory items to identify excess inventories on-handon hand by comparing on-hand balances to anticipated usage using recent historical activity, as well as anticipated or forecasted demand, based upon sales and marketing inputs through its planning systems.  If estimates of demand diminish or actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required with a resulting charge to operations.

Deferred Income Taxes

The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.  The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance.  Should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

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PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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