Business Overview

This section should be read in conjunction with the Condensed Consolidated Financial Statements of the Company included elsewhere herein and the Company's Form 10-K for the fiscal year ended January 31, 2008.

The Company develops and manufactures systems that have the ability to acquire, process, analyze, store and present electronic data in a variety of useable forms. The Company sells its product under brand names including Astro-Med Test & Measurement (T&M), QuickLabel Systems (QuickLabel) and Grass Technologies (GT). Products sold under the Astro-Med brand acquire and record data and print the output onto charts or electronic media. Products sold under the QuickLabel Systems brand create product and packaging labels and tags in one or many colors. Products sold under the Grass Technologies brand electronically capture and record neurological data that is used to diagnose epilepsy or to study sleep disorders. The Company supplies a range of products that include hardware, software and consumables to customers who are in a variety of industries.

The Company competes worldwide in many markets including clinical and research medicine, aerospace, automotive and general manufacturing. The Company retains a competitive position in its respective markets by virtue of proprietary technology, product reputation, delivery, technical assistance and service to customers. The Company markets its products worldwide by advertising and promotion using major national and international trade journals, scientific meetings and trade shows, direct mailing campaigns and the internet. The products are sold by direct field sales persons as well as independent dealers and representatives. In the United States, the Company has direct field sales people located in major cities from coast to coast specializing in either T&M Recorders and Data Acquisitions systems, QuickLabel Color Label printers and media systems, or Grass Technologies Neurological Instrumentation products. Additionally, the Company has direct field sales and service centers in Canada, England, France and Germany. In the remaining parts of the world, the Company utilizes approximately 80 independent dealers and representatives selling and marketing its products in 40 countries.

Products sold under the Astro-Med brand include ToughWriter page printers and ToughSwitches for use in passenger and military aircraft. ToughWriter page printers are used in both the cockpit and the cabins of aircraft. ToughSwitches are also used in military vehicles. These and other similar products are ruggedized and comply with rigorous military standards specifications for operation under extreme environmental conditions. The Company is currently furnishing ToughWriters for the Airbus A380, the Boeing C-17, B-787, B-777, B-747, B-767, and the Lockheed C-130. Other products sold under the Astro-Med brand include the Everest, a telemetry workstation used widely in the aerospace industry to monitor and track space vehicles, aircraft and missiles under test. The Everest ranges in price from $18,000 to $35,000 depending on features and options selected. The Astro-Med brand Dash Series constitute a family of portable electronic data acquisition systems which are used as maintenance and troubleshooting instruments for pulp, paper, metal mills, power plants, automotive R & D centers and manufacturing plants. Included in the Dash Series are the Dash 2EZ, Dash 8X, Dash 8HF, Dash 8XPM, Dash 32HF and the Dash 18 and they range in price from $3,500 to $20,000 depending on model and features and options selected.

Products sold under the QuickLabel System brand include a family of digital color label printers including the Vivo!, the first electrophotographic roll-to-roll printer, the QLS-4100 XE, QLS-8100 XE, QLS-2000 and QLS-3000 thermal transfer label printers, the ZEO inkjet printer which was introduced in fiscal 2008, as well as a line of monochrome thermal transfer digital label printers including the Pronto! Series. This Series includes four models used in printing bar code labels. QuickLabel digital color label printers are sold via a direct sales force throughout the US, Canada and Western Europe, and serviced by a factory-trained, direct technical support staff. In the rest of the world, QuickLabel uses a broad network of dealers to sell and support its products. QuickLabel's unique labeling solutions are aimed at label printing applications in which product packaging requires frequent content changes. QuickLabel digital color label printers fill a critical need in environments that require on-demand flexibility to package multiple product variations, and to add value to the product itself, as in private labeling, to produce OEM packaging, and to customize virtually any product. Industries that require instant label production flexibility include food and beverage, foodservice distribution, grocery retailing, chemical and sanitary supplies, pharmaceutical and medical products, personal care products, advertising specialties, tire manufacturing and apparel. Custom QuickLabel, a custom label creation software package, is an integral part of the QuickLabel printing system, and was designed by the same team of engineers who designed the digital label printers. The latest generation of QuickLabel's proprietary user-friendly label creation software offers significant new tools for simplifying label creation and for controlling and enhancing label output. The Company's patented MicroCellŽ half-toning algorithms have been improved in this latest version of the software, so that printers driven by Custom QuickLabel now render process-color print quality that closely approximates digital artwork. QuickLabel digital label printers generate revenue through label, tag, thermal transfer ribbon and toner cartridge consumables sales. The Company engineers and manufactures unique printing supplies especially for use in optimizing the performance of the QuickLabel brand of digital label printers.

Products sold under the Grass Technologies (GT) brand include systems, instruments and software products to detect, amplify and display the electrical activity of the human brain commonly called electroencephalography (EEG). EEG data is used by clinicians to diagnose epilepsy and other neurological conditions including sleep apnea. Included in the GT line of products are the Comet, the Aura, the wireless Aura PSG, and the Beehive. These systems are all operated under the Twin software system, a Windows-based multi-module software program developed by the Company over the past six years. Included also is a line of amplifiers, electrodes, transducers and stimulators used by clinicians and researchers. Products sold under the Grass Technologies brand are sold to hospitals, sleep centers, clinics and doctors offices. All GT clinical products which are connected to the human body are approved by the Food and Drug Administration (FDA).

                                ASTRO-MED, INC.

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                           AND RESULTS OF OPERATIONS

Results of Operations

Three-Months Ended May 3, 2008 vs. Three-Months Ended May 5, 2007



                                 Sales as                       Sales as       % Increase
                                  a % of                         a % of           Over
                 May 3, 2008    Total Sales     May 5, 2007    Total Sales     Prior Year
    T&M          $  3,960,000          19.7 %   $  3,465,000          21.1 %          6.5 %
    QuickLabel      9,749,000          52.2 %      8,916,000          54.3 %          9.3 %
    GT              4,979,000          28.1 %      4,026,000          24.6 %         23.7 %

    Total        $ 18,688,000         100.0 %   $ 16,407,000         100.0 %         13.9 %

Sales revenue in the first quarter was $18,688,000, up 13.9% from the prior year's first quarter sales revenue of $16,407,000. Sales through each of the Company's product groups increased with T&M increasing 6.5%, QuickLabel increasing 9.3% and GT increasing 23.7%. Sales through the Company's domestic channel of distribution were $13,037,000, up 9.1% from the prior year. Sales through the Company's international channel of distribution were $5,651,000, up 26.7% from the prior year. Excluding the $473,000 favorable impact of the change in foreign exchange rates, international sales would have increased 16.1%.

Hardware sales in the quarter were $8,956,000 reflecting a 25.1% increase from the prior year's hardware sales of $7,161,000. Each product group experienced increases in hardware sales with T&M increasing 16.8%, QuickLabel increasing 21.5% and GT increasing 37.1%.

The Company's consumable sales continue to expand with the first quarter volume reaching $8,359,000, reflecting an increase of 5.7% from the prior year's consumable sales of $7,907,000. The increase was driven by the Quicklabel Consumables which were up 6.5% from the prior year. T&M and GT consumable sales were essentially flat.

Sales of the Company's service and other related-product revenue in the quarter was $1,374,000, up 2.6% from the prior year's service and other related product revenue of $1,339,000.

Gross profit dollars were $8,187,733, generating a gross profit margin of 43.8% in the quarter which was higher than the prior year's gross profit margin of 41.7%. The gross margin increase was the result of an improvement in product mix associated with the higher hardware sales and improved manufacturing absorption associated with the higher sales volume.

Operating expenses were $6,893,024 for the quarter compared to $6,224,892 for the same quarter in the prior year. Selling & Marketing expenses increased 8.6% from the prior year as a result of additional personnel costs, commission expenses, advertising expenses and trade show expenses. G&A increased 18.1% as a result of personnel costs and professional fees. As a percent of sales SG&A decreased to 30.3% from 31.2% in the prior year. Research and development spending increased 11.6% as a result of increases in personnel costs and outside development expenses. R&D expenses represented 6.6% of sales which was consistent with the prior year. Operating income was $1,294,709 which was up 108% from the prior year. Operating margins were 6.9% which was up from the prior year's operating margin of 3.8%.

Other income was $175,994 for the quarter, down 29.2% from the prior year. The decrease was driven by lower investment income and lower foreign currency transaction gains.

An income tax expense of $573,574 was recorded in the first quarter of the current year which was equal to an effective tax rate of 39.0%. This compares to an income tax expense of $348,033 in the first quarter of the prior year which was equal to an effective tax rate of 40.0%.

Net income in the first quarter was $897,129 reflecting a 4.8% return on sales and an EPS of $0.12 per diluted share. For the comparable period in the previous year, net income was $521,999, reflecting a 3.2% return on sales and an EPS of $0.07 per diluted share.

Results of Operations (Continued)

Three-Months Ended May 3, 2008 vs. Three-Months Ended May 5, 2007

The Company reports three reporting segments consistent with its sales product groups: Test & Measurement (T&M); QuickLabel Systems (QuickLabel) and Grass-Technologies (GT). The Company evaluates segment performance based on the segment profit before corporate and financial administration expenses.

Summarized below are the sales and segment operating profit for each reporting segment.

                                                                        Segment
                                           Sales                   Operating Profit
                                May 3, 2008    May 5, 2007    May 3, 2008    May 5, 2007
   T&M                          $  3,960,000   $  3,465,000   $    628,000   $    412,000
   QuickLabel                      9,749,000      8,916,000      1,010,000        913,000
   GT                              4,979,000      4,026,000        747,000        234,000

   Total                        $ 18,688,000   $ 16,407,000      2,385,000      1,559,000

   Corporate Expenses                                            1,090,000        938,000

   Operating Income                                              1,295,000        621,000
   Other Income, Net                                               176,000        249,000

   Income Before Income Taxes                                    1,471,000        870,000
   Income Tax Expense                                              574,000        348,000

   Net Income                                                 $    897,000   $    522,000

Test & Measurement

T&M sales were $3,960,000 for the quarter compared to $3,465,000 in the prior year. The increase of $495,000, or 14.3%, was primarily driven by higher Dash sales. Ruggedized products were up slightly while Everest sales were down slightly. Consumable sales were down slightly and Service & Other were up slightly from the prior year. Gross profit margins increased as a result of improved product mix and higher volume. Operating expenses increased 17.6% due to higher foreign selling expense. Segment operating margins were 15.9% for the quarter which was up from the prior year's segment operating margins of 11.9%.

QuickLabel Systems

QuickLabel sales were $9,749,000 for the quarter compared to $8,916,000 in the prior year. The increase of $833,000, or 9.3%, was driven by an increase in both hardware and consumable sales. Hardware sales increased 21.4% for the quarter while consumable sales increased 6.5%. Gross profit margins were essentially flat in the quarter. Operating expenses increased 8.5% as a result of higher personnel costs and higher commission expense associated with the increase in sales. Segment operating margins were 10.4% for the quarter which was consistent with the prior year's segment operating margins of 10.2%.

Grass Technologies

GT sales were $4,979,000 for the quarter compared to $4,026,000 in the prior year. The increase of $953,000 or 23.7% was primarily driven by increases within sleep system sales and research product sales. Consumable sales increased 4.8% during the quarter. Gross profit margins were higher for the quarter due to better product mix associated with the sleep system sales and improved manufacturing absorption resulting from the increase in sales volume. Operating expenses increased 6.3% due to higher commission costs associated with the higher sales. Segment operating margins were 15.0% for the quarter which was up significantly from the prior year's segment operating margins of 5.8%.

Financial Condition

The Company expects to finance its future working capital needs, capital expenditures and acquisition requirements through internal funds. To the extent the Company's capital and liquidity requirements are not satisfied internally, the Company may utilize a $3.5 million unsecured bank line of credit, all of which is currently available. Borrowings under this line of credit bear interest at the bank's prime rate. The expiration date of this line of credit is July 31, 2009.

The Company's Statements of Cash Flows for the three-months ended May 3, 2008 and May 5, 2007 are included on page 5. Net cash flow provided by operating activities for the current quarter was $1,930,789 versus $461,029 used in the first quarter of the previous year. The favorable change in the current quarter cash flow over the prior year can be attributed to the increase in net income and better management of working capital. The accounts receivable balance decreased 10.9% to $11,374,631, down from $12,761,281 at year-end. The cash collection cycle also improved to 52 net days sales outstanding at the end of the quarter as compared to the 58 days sales outstanding at year-end. Inventory increased 4.5% to $14,685,329, up from $14,050,619 at year-end. Net days inventory on hand were 126 days at the end of the quarter which was consistent with year-end.

Financial Condition (Continued)

Cash and investments at the end of the first quarter totaled $19,145,326 up 9.1% from $17,555,607 at year-end. The increase in cash and investments can be attributed to cash provided by operations of $1,930,789 and cash proceeds of $704,449 received from common shares issued under employee stock option and benefit plans partially offset by capital expenditures of $575,704 and the payment of dividends of $420,528.

Critical Accounting Policies, Commitments and Certain Other Matters

In the Company's Form 10-K for the fiscal year ended January 31, 2008, the Company's most critical accounting policies and estimates upon which our financial status depends were identified as those relating to revenue recognition, warranty claims, bad debt, inventories and long-lived assets. We considered the disclosure requirements of Financial Release ("FR") 60 ("FR-60") regarding critical accounting policies and FR-61 regarding liquidity and capital resources, certain trading activities and related party/certain other disclosures, and concluded that nothing materially changed during the quarter that would warrant further disclosure under these releases.

Safe Harbor Statement

This document contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Factors which could cause actual results to differ materially from those anticipated include, but are not limited to, general economic, financial and business conditions; declining demand in the test and measurement markets, especially defense and aerospace; competition in the specialty printer industry; ability to develop market acceptance of the QuickLabel color printer products and effective design of customer required features; competition in the data acquisition industry; competition in the neurophysiology industry; the impact of changes in foreign currency exchange rates on the results of operations; the ability to successfully integrate acquisitions; the business abilities and judgment of personnel and changes in business strategy.