Summary of ADDVANTAGE TECHNOLOGIES GROUP INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Special Note on Forward-Looking Statements

Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight including changes in the trends of the cable television industry, formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers should carefully review the risk factors described under Item 1A of our Annual Report on Form 10-K filed for the year ended September 30, 2007 and in other documents we file from time to time with the Securities and Exchange Commission.

Overview

The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of ADDvantage Technologies Group, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements ("Notes").

We are a Value Added Reseller ("VAR") for select Cisco and Motorola new products and we are a distributor for several other manufacturers of cable television ("CATV") equipment. We also specialize in the sale of surplus new and refurbished previously-owned CATV equipment to CATV operators and other broadband communication companies. It is through our development of these vendor relationships that we have focused our initiative to market our products and services to the larger cable multiple system operators ("MSOs") and Telecommunication Companies ("Telcoms"). These customers provide an array of different communications services as well as compete in their ability to offer subscribers 'Triple Play' transmission services, including data, voice and video.

Result of Operations

Comparison of Results of Operations for the Three Months Ended June 30, 2008 and June 30, 2007

Net Sales. Net sales decreased $4.4 million, or 25%, to $13.2 million for the third quarter of fiscal 2008 from $17.6 million for the same period of fiscal 2007. New equipment sales declined by $4.5 million, or 35%, to $8.2 million in the third quarter of fiscal 2008 from $12.7 million in the third quarter of fiscal 2007. Sales continued to remain at reduced volumes during the third quarter as certain large MSOs continued to delay their upgrade projects while other MSOs have been able to obtain the equipment necessary for scheduled capital projects directly from the manufacturer without interruption or delay. Sales to the Company's top five customers declined $3.5 million compared to third quarter 2007 volumes, accounting for over 80% of the total decline in sales. Refurbished equipment sales increased $0.2 million, or 6%, to $3.6 million in the third quarter of fiscal 2008, from $3.4 million for the same period last year. Sales of refurbished products increased primarily due to sales of our legacy digital converter boxes which grew approximately $0.6 million over the three months ended June 30, 2007. Repair service revenue decreased $0.1 million, to $1.4 million in the third quarter of fiscal year 2008 compared to $1.5 million in the same period of fiscal 2007. Repairs declined slightly in comparison to last year's third quarter numbers but remained consistent with the first and second quarter of the current fiscal year. The Company continues to expect increased repair services during the remainder of the year as several large MSOs continue to delay rebuild projects and experience increased failure in older equipment.

Costs of Sales. Costs of sales includes (i) the costs of new and refurbished equipment, on a weighted average cost basis, sold during the period, (ii) the costs of equipment used in repairs, (iii) the related transportation costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales decreased $1.6 million, or 14%, to $9.9 million in the third quarter of fiscal 2008 from $11.5 million for the same period in fiscal 2007. This decrease was primarily due to the decrease in new product sales for the period. Cost of sales was also impacted by a $0.7 million charge to increase our obsolescence reserve which consisted primarily of a $0.5 million reserve increase to cover approximately 32,000 Scientific Atlanta legacy converter boxes that we have deemed unsellable. We originally acquired these boxes from Adelphia in 2006 as part of a bulk purchase of 100,000 Scientific Atlanta and Motorola boxes for $1.75 million. Our remaining Scientific Atlanta boxes have been deemed unsellable as the vast majority of the waivers that were granted last July by the FCC that allow domestic operators to continue to acquire these legacy boxes have expired. The lack of domestic sales opportunities coupled with the limited international opportunities to sell our legacy Scientific Atlanta digital converter boxes have led us to reduce the carrying costs on these boxes to their potential scrap value.

Gross Profit. Gross profit decreased $2.7 million, or 44%, to $3.4 million in the third quarter of fiscal 2008 from $6.1 million for the same period in fiscal 2007. The decline in gross margin consisted of $2.0 million due to reduced sales volumes and margins as well as an increased charge to cost of sales totaling approximately $0.7 million to reserve for obsolete inventory discussed earlier. Gross profit margins decreased to 25.5% in the third quarter of fiscal 2008 from 34.6% in the third quarter of fiscal 2007. Gross profit margins on sales declined in all product lines during the quarter as reduced demand for new products from customers created additional competition from other CATV equipment suppliers and additional charges to increase our obsolete inventory reserve.

Income from Operations. Income from operations declined $2.4 million, or 65%, to $1.3 million for the third quarter of fiscal 2008 from $3.7 million for the same period of fiscal 2007. Income from operations primarily decreased as a result of the decrease in sales for the period offset by reduced operating, selling, general and administrative expenses.

Interest Expense. On November 27, 2007 we amended our $8.0 million term note with our primary financial lender to $16.3 million and extended the maturity to November 30, 2012. The outstanding balance of the $8.0 million term loan prior to the amendment was $4.3 million. The $12.0 million of additional funds available under the amended $16.3 million term loan were fully advanced at closing and the proceeds were used to redeem all of the issued and outstanding shares of our Series B 7% Cumulative Preferred Stock. The impact on income available to holders of common stock from the increased interest expense is expected to be fully offset by the elimination of dividends paid on the outstanding preferred shares. Also on November 27, 2007, we entered into an interest rate swap agreement to effectively fix the interest on the new $16.3 million quarterly amortizing note at 5.92%. Interest on the remaining debt instruments, which had outstanding principal balances totaling $4.2 million as of June 30, 2008, fluctuates periodically based on the specific criteria outlined in the corresponding debt agreements. Interest expense for the third quarter of fiscal 2008 was $0.3 million, or an increase of $0.2 million over the $0.1 million of interest expense reported in the third quarter of fiscal 2007. The increased interest expense resulted primarily from the additional borrowings under the amended $16.3 million term note.

Income Taxes. The provision for income taxes for the third quarter of fiscal 2008 was $0.4 million, or 37.5% of profit before taxes, compared to $1.4 million, or 38.0% of profit before taxes for the same period last year. Our estimated effective tax rate for 2008 decreased slightly due to the expected utilization of certain investment tax credits to reduce our state taxes.

Comparison of Results of Operations for the Nine months ended June 30, 2008 and June 30, 2007

Net Sales. Net sales decreased by $6.6 million, or 14%, to $41.8 million for the nine months ended June 30, 2008 from $48.4 million for the same period in fiscal 2007. New equipment sales declined $8.6 million, or 25%, to $25.8 million for the nine months ended June 30, 2008 from $34.4 million for the same period in fiscal 2007. The decline in new product sales resulted primarily from sales to our top five customers whose volumes declined $8.6 million from the same period of fiscal 2007. The decline in sales to these top MSO customers resulted from their continued delays in upgrades expected to be performed during the period as well as an improvement in the manufacturers' ability to deliver needed equipment, with minimal interruption or delay, directly to these large customers. Sales of refurbished products grew $2.0 million, or 20%, to $12.0 million for the nine months ended June 30, 2008 from $10.0 million for the same period fiscal 2007. Sales of our legacy digital converter box product line represented $1.9 million of the increased sales in this product line. Repair service revenues increased $0.1 million, or 3%, to $4.1 million for the nine months ended June 30, 2008 from $4.0 million for the same period of fiscal 2007. The increase in service revenues results from higher volumes of equipment failures as certain customers delay equipment upgrades and then incur additional out of warranty equipment failures.

Costs of Sales. Costs of sales includes (i) the costs of new and refurbished equipment, on a weighted average cost basis, sold during the period, (ii) the equipment costs used in repairs, (iii) the related transportation costs, and
(iv) the labor and overhead directly related to these sales. Costs of sales decreased $3.3 million, or 10%, to $29.1 million for the nine months ended June 30, 2008 from $32.4 million for the same period of fiscal 2007. The decrease in cost of sales was directly related to the decrease in revenues during the year offset by the increase in our obsolescence reserve.

Gross Profit. Gross profit decreased $3.3 million, or 21%, to $12.7 million for the nine months ended June 30, 2008 from $16.0 million for the same period of fiscal 2007. The decrease in gross profit was a result of the decrease in sales for the period. Gross profit margins decreased to 30.3% during the first nine months of fiscal 2008 from 33.0% in the same period last year. Gross profit margins declined across all product lines by approximately $0.3 million primarily from product line mix changes and increased price pressures from other competitors due to the overall decline in CATV equipment purchasing during the period. Our gross margin was also impacted due to the increase in our obsolete inventory reserve of approximately $0.8 million over the amount reserved during the first nine months of 2007. Our obsolete inventory reserve increased primarily due to certain legacy digital converter boxes that have been deemed unsellable.

Operating, Selling, General and Administrative Expenses. Operating, selling, general and administrative expenses include personnel costs (including fringe benefits, insurance and taxes), occupancy, communication and professional services, among other less significant cost categories. Operating, selling, general and administrative expenses declined $0.3 million to $6.2 million during the first nine months of 2008 from $6.5 million reported in same period of fiscal 2007. During the first nine months we incurred reduced bonus accrual, property taxes and rental costs, which combined to a savings of approximately $0.4 million. This savings was offset by $0.2 million of increased professional services primarily from consultants we hired to assist us with meeting the internal control assessment requirements of the Sarbanes Oxley Act of 2002. We expect these increased professional fees to continue through the remainder of the year but do not believe they will have a material impact on our overall financial performance.

Income from Operations. Income from operations decreased $3.0 million, or 32%, to $6.5 million for the nine months ended June 30, 2008 from $9.5 million for the same period last year. Income from operations decreased primarily due to decreased product sales and an increase in our reserve for obsolete inventory.

Interest Expense. As discussed previously, on November 27, 2007 we amended our $8.0 million term note with our primary financial lender to $16.3 million, extended the maturity to November 30, 2012 and entered into an interest rate swap to effectively fix the rate on this increased debt at 5.92%. Interest on our remaining debt instruments, which had outstanding principal balances totaling $4.2 million as of June 30, 2008, fluctuates periodically based on the specific criteria outlined in the corresponding debt agreements. Interest expense for the nine months ended June 30, 2008 was $0.7 million, or an increase of $0.3 million over the $0.4 million of interest expense reported during the same period in fiscal 2007. The increased interest expense was associated with the additional borrowings under the amended $16.3 million term note.

Income Taxes. The provision for income taxes for the first nine months of fiscal 2008 was $2.2 million, or 37.5% of profit before taxes, compared to $3.4 million, or 38% of profit before taxes for the same period last year. Our estimated effective tax rate for 2008 decreased slightly as we expect to utilize certain investment tax credits which will result in reduced state taxes.

Recently issued Accounting Standards

In May 2008, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 162, The Hierarchy of Generally Accepted Accounting Principles. The purpose of this standard is to provide a consistent framework for determining what accounting principles should be used when preparing U.S. GAAP financial statements. SFAS 162 categorizes accounting pronouncements in a descending order of authority. In the instance of potentially conflicting accounting principles, the standard in the highest category must be used. This statement will be effective 60 days after the SEC approves the Public Company Accounting and Oversight Board's related amendments. We do not expect the adoption of SFAS 162 to have a material effect on our financial statement.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for us beginning January 1, 2009. We are currently assessing the disclosure requirements of SFAS No. 161 and plan on including the required information in our first quarter fiscal 2009 financial statements, if not adopted earlier.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and will apply prospectively to business combinations completed on or after that date. We do not expect the adoption of SFAS No. 141R to have a material effect on our financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements being both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. We adopted SAB No. 108 in the first quarter of fiscal year 2007 and its adoption had no impact on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for us beginning October 1, 2008. We do not expect the adoption of SFAS No. 157 to have a material effect on our financial statements.

In June 2006, the FASB issued Interpretation Number ("FIN") No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In fiscal 2006, we elected early adoption of FIN No. 48 and there was no impact on our financial statements.

In June 2006, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on EITF issue No. 06-2, "Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43." EITF Issue No. 06-2 requires companies to accrue the costs of compensated absences under a sabbatical or similar benefit arrangement over the requisite service period. EITF issue No. 06-2 was effective for us beginning October 1, 2007 and the adoption of EITF Issue No. 06-2 did not result in a material adjustment to our financial statements.

Critical Accounting Policies