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

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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, bylaws, and Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving us.

We also have a stockholder rights plan 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 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 bylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common stock. These include provisions that classify our board of directors, limit the ability of stockholders to take action by written consent, call special meetings, remove a director for cause, amend the bylaws, or approve a merger with another company.  In addition, our bylaws set forth advance notice procedures for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

We are subject to the provisions of Section 203 of the Delaware General Corporation Law which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, either alone or together with affiliates and associates, owns (or within the past three years did own) 15% or more of the corporation’s voting stock.

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Dividends

The Company did not pay any dividends in 2007,2008, 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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forward-looking statement.  Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.

The $95 million revenue value of the automotive contract is an estimate, based on the automotive supplier’s projected needs.  The Company cannot guarantee that it will fully benefit from this contract, which is terminable by the automotive supplier for any reason, subject to a cancellation charge that includes, among others, a provision whereby the customer will reimburse the Company for its total capital investment less any depreciation taken.  The Company’s revenues from this contract are directly dependent on the ability of the automotive supplier to develop, market and sell its products in a timely, cost-effective manner.  If the automotive supplier’s needs decrease over the course of the contract, the Company’s estimated revenues from this contract may also decrease.  Even if the Company generates revenue from the project, the Company cannot guarantee that the project will be profitable, particularly if revenues from the contract are less than expected.  Other examples16

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; (ii) actions by the Company’s competitors and the ability of the Company to respond to such actions; (iii) the ability of the Company to obtain new customers; 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”).  In compliance with the provisions of FIN 46(R),46R, the Company has consolidated the financial statements of UDT for all periods presented, because–because — when including related party ownership–ownership — the Company effectively owns greater than 50% of UDT.

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:

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Overview

UFP Technologies is an innovative designer and custom converter of foams, plastics, and fiber products.  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.

Despite soft sales in the first half of 2007, the Company significantly improved its profit margins throughout the year, enabling it to generate record annual earnings.  The Company attributes its profit margin improvements to improvements in the quality of its book of business and reductions in manufacturing costs.  Efforts to further improve the quality of its book of business and reduce manufacturing costs remain key tenets of the Company’s strategic business plan.

On January 18, 2008, the Company acquired Stephenson & Lawyer, Inc. (“S&L”), a Grand Rapids, Michigan-based foam fabricator.  Operating out of a 255,000-square-foot manufacturing plant, S&L specializes in the fabrication of technical urethane foams.  In addition to significantly adding to the Company’s real estate, S&L brings to the Company access to this family of foams, modern manufacturing capabilities, and a seasoned management team.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.

2008 Compared to 2007

Net sales increased 17.6% to $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, 2008, from $53.8 million in the 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 23.5% to $49.2 million for the year ended December 31, 2008, from $39.8 million in the same period of 2007.  The increase in sales is largely due to an increase in sales of $3.9 million to a key electronics customer, as well as increased demand for environmentally friendly molded fiber packaging.

Gross profit as a percentage of sales (“Gross Margin”) increased to 26.0% in 2008 from 24.4% in 2007.  The improvement in gross margin is primarily attributable to Company-wide continued strategic pricing and manufacturing efficiency initiatives (material and labor as a percentage of sales are down 1.2% and 0.8%, respectively) partially offset by lower gross margins in the Company’s automotive plants (Component Products segment).

Selling, General and Administrative Expenses (“SG&A”) increased 20.9% to $18.8 million for the year ended December 31, 2008, from $15.6 million in 2007.  As a percentage of sales, SG&A was 17.1% and 16.7% in the years ended December 31, 2008, and 2007, respectively.  The increase in SG&A spending is primarily attributable to increased SG&A from the newly acquired plant in Grand Rapids of approximately $2.2 million (Component Products segment) as well as increased equity-based compensation of approximately $600,000 (Component Products and Packaging segments).

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 stay-bonuses for its employees, equipment moving and hook-up costs, and training and other start-up costs.  As of December 31, 2008, the move was completed and all significant costs had been incurred.

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Interest expense decreased to approximately $334,000 for the year ended December 31, 2008, from $479,000 in 2007.  The decrease in interest expense is primarily attributable to lower average borrowings.

The Company recorded income tax expense as a percentage of pre-tax income of 36.9% and 38.3% for the years ended December 31, 2008, and 2007, respectively.  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, 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.

2007 Compared to 2006

The Company’s net sales decreased slightly to $93.6 million for the year ended December 31, 2007, from $93.7 million in 2006.  While 2007 sales were virtually the same as sales in 2006, there was a shift in product mix.  Sales in the Component Products segment decreased approximately 4.2%, largely due to shrinking sales to the automotive market.  The Company attributes the reduction in automotive sales to the end of certain programs in its Michigan plant, as well as the 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 Engineered Packaging segment sales.  The Company attributes this increase primarily to approximately $1.3 million in increased sales of case insert products to key accounts.

Gross profit as a percentage of sales (“Gross Margin”) increased to 24.4% in 2007 from 20.5% in 2006.  The improvement in gross margin is primarily attributable to manufacturing efficiency initiatives, particularly in the Company’s automotive operations (Component Products segment).  The Company estimates that these initiatives in the automotive operations improved gross margins by approximately 2.0%.

Selling, General and Administrative Expenses (“SG&A”) increased 9.7% to $15.6 million for the year ended December 31, 2007, from $14.2 million in 2006.  As a percentage of sales, SG&A was 16.7% and 15.1% in the years ended December 31, 2007, and 2006, respectively.  The increase in SG&A spending is primarily attributable to increased sales resources of approximately $700,000 (across both business segments) as well as equity-based compensation resulting from the implementation of SFAS No. 123 (R)123R (Component ProductProducts and Packaging segments) of approximately $250,000.

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Interest expense decreased to approximately $479,000 for the year ended December 31, 2007, from $964,000 in 2006.  The decrease in interest expense is primarily attributable to lower average borrowings partially offset by the impact of higher interest rates.

The Company recorded income tax expense as a percentage of pre-tax income of 38.3% and 37.3% for the years ended December 31, 2007, and 2006, respectively.  The higher effective tax rate for 2007 reflects a reduction in the amount of eligible research and development tax credits expected to be taken on the Company’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 assets will be realized, and has not recorded a tax valuation allowance at December 31, 2007.  The Company expects to utilize a significant amount of its federal NOLsnet 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.

2006 Compared to 2005

The Company’s net sales increased 11.7 % to $93.7 million for the year ended December 31, 2006, from $84 million in 2005.  Component Product sales increased 15.8% to $55.8 million in 2006, from $48.2 million in 2005.  The increase in sales is primarily due to increased sales from recently launched automotive programs, as well as strong demand from customers in the medical and military markets.  Packaging sales increased 6.4% to $38.0 million in 2006 from $35.7 million in 2005.  The increase in sales is primarily due to stronger demand for electronics packaging products and fiber packaging.

Gross profit as a percentage of sales (“Gross Margin”) increased to 20.5% in 2006, from 17.4% in 2005.  The improvement in gross margin is primarily attributable to the fixed portion of labor and overhead measured against higher sales in both the Component Product and Packaging segments, and the reduction in labor from 2005 when the Company incurred excess labor associated with the launch of several automotive programs.  The material portion of cost-of-sales was slightly higher as a percent of sales in 2006 due primarily to the new automotive programs accounting for a higher portion of sales.

Selling, General and Administrative Expenses (“SG&A”) increased 14.1% to $14.2 million for the year ended December 31, 2006, from $12.4 million in 2005.  As a percentage of sales, SG&A was 15.1% and 14.8% in the years ended December 31, 2006, and 2005, respectively.  The increase in SG&A spending is primarily attributable to equity-based compensation resulting from the implementation of SFAS No. 123 (R) (Component Product and Packaging segments), increased corporate governance and compliance costs (Component Product and Packaging segments) and incremental SG&A within the automotive business unit (Component Product segment).

Interest expense decreased to $964,000 for the year ended December 31, 2006, from approximately $1,041,000 in 2005.  The decrease in interest expense is primarily attributable to lower average borrowings partially offset by the impact of higher interest rates.

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The Company recorded income tax expense of 37% and 24% for the years ended December 31, 2006, and 2005, 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, 2006.  The Company expects to utilize a significant amount of its federal NOLs when it prepares its 2006 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.

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, 2007,2008, and 2006,2007, working capital was approximately $14,952,000$18,688,000 and $8,236,000,$14,952,000, respectively.  The increase in working capital is primarily attributable to an increase in cashreceivables and inventory of approximately $8.0$959,000 and $2.3 million, respectively, due largely to strong cash flowthe acquisition of Stephenson & Lawyer, Inc. in 2007, partially offset by an increaseJanuary 2008 and a decrease in accounts payable of approximately $1.1$2.4 million due to the timing of year-end check runs, and an increasepartially offset by a decrease in accrued taxes and other expensescash of approximately $760,000$2.3 million due largely to an increased federal income tax liability.the Company’s acquisition of Stephenson & Lawyer. Cash provided from operations was approximately $7.3 million and $10.1 million in 2008 and $12.1 million in 2007, and 2006, respectively.  The primary reason for the decrease in cash generated from operations in 20072008 is a $3.8decrease in accounts payable of approximately $2.1 million collection of accounts receivable fromduring the fiscal year ended December 31, 2005,2008, compared to December 31, 2006, the majority of which was derived from the customer of a new automotive program partially offset by an increase in net incomeaccounts payable of approximately $1.6 million.$500,000 during fiscal 2007.  This change was caused by the difference in the timing of check runs at the end of each respective year.  Net cash used in investing activities in 20072008 was approximately $2.1$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 as well as the cost of a new roof  for the Company’s manufacturing plant in Florida (included in $394,000 in cash used in investing activities by UDT).  In 2006, the Company spent approximately $300,000 for the acquisition of substantially all of the assets of Stephen Packaging.$2.8 million.

On February 28, 2003, the Company obtained a 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 seven-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 Company.  For example, as of December 31, 2007, based upon no revolving credit facility borrowings outstanding and collateral levels, the Company had availability of $12.9 million of 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

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Company.  The credit facility calls for interest of LIBOR plus a margin that ranges from 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, 2007, had interest computed at Prime or LIBOR plus 1.0%.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 certain financial covenants, including maximum capital expenditures anda minimum fixed-charge coverage.  As of December 31, 2007, the Company was in compliance with all of these covenants.coverage financial covenant.  The Company’s $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, 2007, the interest rate on these facilities ranged from 5.9% to 7.3%.January 29, 2016.

As a result of the consolidation of UDT, a mortgage note collateralized by the Alabama and Florida facilities, dated September 4, 2002, originally for $470,313, was 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 180 monthly payments of $7,147.  The interest rate is fixed at approximately 7.2%.  The additional funds of approximately $400,000 were used to fund building improvements in the Florida facility.    Payments on this note are funded through rent payments that the Company makes on its Alabama and Florida facilities.  The Company is not a guarantor and is not subject to any financial covenants under this mortgage note.  The outstanding balance on this note at December 31, 2007,2008, is $768,744.$737,289.

In addition to the above credit facilities, the Company hashad capital lease debt of $2,317,072$1,612,665 as of December 31, 2007.2008.  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 7% to 8%.  Subsequent to December 31, 2008, the Company paid off these obligations in full.

The Company has no significant capital commitments in 2008,2009, 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 2008, which2009 that are complementary to its business.  The Company believes that its existing resources, including its revolving credit 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 2008.2009.  However, there can be no assurances that such financing will be available at favorable terms, if at all.

The Company’s primary credit facility expires in February 2009.  During 2008, the Company plans to extend the term of its primary credit facility or secure a new credit facility.  Although the Company believes it will be successful in accomplishing this objective, there can be no assurances that such financing will be available at favorable terms, if at all.

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Commitments, Contractual Obligations and Off-Balance Sheet Arrangements

The following table summarizes the Company’s contractual obligations at December 31, 2007,2008, 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, 2007,2008, 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 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.

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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

Intangible assets include patents and other 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 circumstances indicate that their value may be 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 make significant judgments regarding future periods that are subject to some factors outsideinclude 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 Company’s control.  Changes in these estimates can result in significant revisions toreporting unit’s net assets exceeds the carryingestimated fair value of these assetsthe reporting unit. The Company completed its annual goodwill impairment test as of December 31, 2008, and may result in material charges to the results of operations.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 hand by comparing on handon-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.

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On  February 21, 2008, the Compensation Committee approved the grant of stock unit awards to certain executive officers of the Company as indicated below.  The grants of stock unit awards were made under and pursuant to the Company’s 2003 Equity Incentive Plan, as amended.  Subject to the terms of the Company’s 2003 Equity Incentive Plan and the stock unit award agreement evidencing such award, each stock unit award provides the recipient with the right to receive one share of common stock of the Company.  Recipients of the stock unit awards will have no rights as stockholders of the Company, including, without limitation, the right to vote or to receive dividends, until and to the extent any applicable performance objectives have been satisfied, such stock unit awards have vested, and the issuance of the shares of common stock in respect of the stock unit awards has been appropriately evidenced.

The stock unit awards listed in columns “A,” “B” and “C” above are subject to (i) time-based and continuous employment vesting requirements and (ii) the Company meeting certain financial performance objectives, described below (the “Performance Objectives”).  The Compensation Committee shall determine whether and to what extent any of the Performance Objectives have been achieved by the Company.  Such determination is currently expected to take place in February or March 2009.  Assuming achievement of any of the Performance Objectives, one-third of the applicable awards shall vest on the first anniversary of such determination by the Compensation Committee (i.e., they are expected to vest in February or March 2010), one-third of the applicable awards shall vest on the second anniversary of such determination (i.e., they are expected to vest in February or March 2011) and one-third of the applicable awards shall vest on the third anniversary of such determination (i.e., they are expected to vest in February or March 2012), provided that the recipient remains continuously employed by the Company through each such vesting date.

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The Performance Objectives are based on the Company’s operating income for the Company’s fiscal year ended December 31, 2008, relative to specified operating income target amounts established by the Compensation Committee.  If the Company achieves the “threshold” operating income, then all of the stock unit awards listed in column “A” above will be eligible to become vested, subject to the time-based vesting and continuous employment requirements described above.  If the Company achieves the “target” operating income, then all of the stock unit awards listed in column “B” above (in addition to the stock unit awards listed in column “A” above) will be eligible to become vested, subject to the time-based vesting and continuous employment requirements described above.  To the extent the Company achieves in excess of the “target” operating income, stock unit awards listed in column “C” above (in addition to the stock unit awards listed in columns “A” and “B” above) will be eligible to become vested, subject to the time-based vesting and continuous employment requirements described above, based on a straight-line interpolation of the “target” operating income established by the Compensation Committee in increments of 20% of such stock unit awards, up to the maximum amount listed in column “C” above, which represents “exceptional” operating income, as established by the Compensation Committee.

Any unvested stock unit awards shall terminate upon the cessation of a recipient’s employment with the Company.  In the event of a change in control of the Company (as defined in the stock unit award agreement evidencing the award) at any time following the completion of the Company’s 2008 fiscal year, provided that the recipient has been continuously employed by the Company through the date immediately prior to the effective date of such Change of Control, then subject to achievement of any of the Performance Objectives, the applicable stock unit awards listed in each of columns “A,” “B” and “C” above, to the extent not already vested, shall become fully vested immediately prior to the effective date of such change in control.

The above description of the stock unit awards is qualified in its entirety by reference to the text of the stock unit award agreement evidencing such awards, a copy of the form of which is attached as Exhibit 10.30 and is incorporated herein in its entirety by this reference.

On March 26, 2008, Michael J. Ross notified the Company that he would not stand for re-election at the Company’s 2008 Annual Meeting of Stockholders.  Mr. Ross will continue to serve as a director of the Company through the Company’s 2008 Annual Meeting of Stockholders.  Mr. Ross has been a director of the Company since 1998 and currently serves on the Company’s Compensation Committee.None.

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, and corporate governanceAND CORPORATE GOVERNANCE

The information required by this Item 10 is hereby incorporated by reference to the Company’s definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year.

ITEM 11.EXECUTIVE COMPENSATION

The information required by this Item 11 is hereby incorporated by reference to the Company’s definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year.

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PART IV

ITEM 15.            EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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B.Incorporated by reference to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 1993. The number set forth herein is the number of the Exhibit in said Annual Report.

C.Incorporated by reference to the Company’s report on 8-K dated February 3, 1997.  The number set forth herein is the number of the Exhibit in said  report.

D.Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998.  The number set forth herein is the number of the Exhibit in said Annual Report.

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